Cinerama, Inc. v. Technicolor, Inc.

Supreme Court of Delaware
663 A.2d 1156 (1965)

ELI5:

Rule of Law:

A board of directors that breaches its duty of care may still avoid liability if it can demonstrate that the challenged transaction was entirely fair to the shareholders, which involves a unified analysis of both fair dealing and fair price. A transaction with a procedurally flawed process may still be deemed entirely fair if the evidence shows it yielded the highest price reasonably available.

Facts:

Cinerama, Inc. owned 4.405% of the common stock of Technicolor, Inc.
Ronald O. Perelman, through MacAndrews & Forbes Group, Inc. (MAF), initiated friendly acquisition discussions to purchase Technicolor.
Technicolor's management, led by CEO Kamerman, negotiated with MAF and successfully increased MAF's initial offer from $15 per share to a final price of $23 per share.
The Technicolor board approved the two-stage tender offer/merger with MAF at $23 per share without conducting an active market check or shopping the company to other potential bidders.
One director, Fred R. Sullivan, had a disclosed financial interest, as he was to receive a $150,000 fee contingent upon the deal's completion.
Another director, Arthur N. Ryan, had an undisclosed but assumed interest based on a potential for improved future employment with the acquirer.
The merger agreement did not include a strict 'no-shop' clause and permitted Technicolor to provide information to and negotiate with unsolicited rival bidders.
Cinerama did not tender its shares in the first stage of the transaction and dissented from the second-stage merger.

Procedural Posture:

Cinerama dissented from the Technicolor-MAF merger and petitioned the Delaware Court of Chancery for an appraisal of its shares.
Cinerama then filed a separate personal liability action in the same court against Technicolor directors and MAF for breach of fiduciary duty.
The Court of Chancery ruled that Cinerama must elect a single remedy (appraisal or damages), which Cinerama appealed.
In Cede I, the Delaware Supreme Court reversed, holding that Cinerama could concurrently pursue both actions through trial, and remanded the case.
Following a trial on both actions, the Court of Chancery issued an appraisal opinion valuing Technicolor stock at $21.60 per share.
Subsequently, the Court of Chancery issued its personal liability opinion, finding the directors breached their duty of care but entered judgment for the defendants because Cinerama had not proven it was damaged by the merger price.
Cinerama appealed both judgments to the Delaware Supreme Court.
In Cede II, the Supreme Court affirmed the finding of a duty of care breach but reversed the judgment, holding that such a breach shifts the burden to the directors to prove the 'entire fairness' of the transaction, and remanded for that analysis.

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Issue:

After the business judgment rule presumption has been rebutted due to a breach of the duty of care, can a board of directors satisfy its burden of proving that a merger transaction was entirely fair to the shareholders?

Opinions:

Majority - Holland, Justice

Yes. A breach of the duty of care, which rebuts the business judgment rule's presumption, does not create per se liability for directors; rather, it shifts the burden to the directors to prove the entire fairness of the transaction. The court found that despite the directors' breach of care in failing to conduct a market check, they successfully demonstrated that the sale of Technicolor to MAF was entirely fair. The court employed a unified balancing test, weighing the procedural flaws against the transaction's other attributes. Under the 'fair dealing' prong, the court noted that the negotiations were arm's-length, the board was predominantly independent and acted in good faith, and the vast majority of shareholders approved the deal by tendering their shares. Under the 'fair price' prong, the court found overwhelming evidence of fairness, including a 109% premium over market price, the fact that no higher bids emerged, and the decision by informed insiders to sell their shares at that price. The court concluded that the extraordinarily fair price and other indicia of fair dealing outweighed the process-related breach of care, rendering the transaction entirely fair as a whole.

Analysis:

This case clarifies that a breach of the duty of care is not outcome-determinative in corporate litigation. It solidifies the principle that the entire fairness standard is a substantive review of a transaction's merits, not merely a penalty for a procedural misstep. The decision demonstrates that a sufficiently high price can be the predominant factor in an entire fairness analysis, potentially cleansing a transaction that was otherwise flawed in its process. This gives director-defendants a viable path to avoid liability even after the business judgment rule's protection is lost, reinforcing the holistic and balancing nature of the entire fairness inquiry.

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