- Delaware Chancery Court Instructs Corporate Directors What Not to Do When Considering Interested Merger Transactions
- March 30, 2006 | Author: Gay Parks Rainville
- Law Firm: Pepper Hamilton LLP - Philadelphia Office
The recent decision of the Delaware Chancery Court in the ongoing In re Tele-Communications, Inc. Shareholders Litigation (No. 16470) (Del. Ch. Dec. 21, 2005), provides useful guidance for corporate directors contemplating an "interested merger" transaction.
The court denied the TCI director defendants' summary judgment motion and allowed the plaintiffs' claims challenging the fairness of TCI's 1999 merger with AT&T to proceed to trial. The TCI directors, several of whom received a substantial financial benefit from the merger not equally shared by all TCI shareholders, attempted to shift the burden of proving whether the merger was "entirely fair" to the plaintiffs by pointing to the TCI board's establishment of a special committee that reviewed the transaction before the full board recommended it for shareholder approval.
Citing the following deficiencies in the directors' creation and use of the special committee, the court refused to shift the burden of proof and concluded that the defendants failed to overcome facts developed in discovery suggesting that the merger was unfair to the plaintiffs:
- The TCI board did not provide the special committee with a clear mandate.
- The TCI board did not create a fully disinterested special committee.
- The TCI board did not set the members' compensation at the time of the special committee's formation.
- The TCI special committee did not retain separate financial and legal advisors.
- The TCI special committee was not fully informed.
- The TCI special committee did not engage in arm's length bargaining on behalf of the plaintiff stockholders.
To effectively use the special committee as a shield against liability for approving interested transactions, corporate directors should heed the warnings of the Chancery Court's opinion and exercise care when structuring, implementing, documenting and participating in the special committee process. Otherwise, they may find themselves in the TCI directors' situation of having to prove the fairness of the transaction at trial.