Caseflicks

Supreme Court of Delaware • 1995

Cinerama, Inc. v. Technicolor, Inc.

663 A.2d 1156 | 1995 Del. LEXIS 251

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Takeaway

In short, rebutting the business judgment rule shifts the burden to directors; it does not establish liability if they prove the transaction was entirely fair.

Background

Technicolor agreed to a two-stage sale to MacAndrews & Forbes for $23 per share. Cinerama, which owned about 4.4 percent of Technicolor’s stock, declined to tender its shares and sought an appraisal after the merger. It also sued Technicolor’s directors and others for alleged fiduciary breaches.

After trial, the Court of Chancery found the shares’ appraisal value to be $21.60 but entered judgment for the defendants in the fiduciary-duty action. In an earlier appeal, the Delaware Supreme Court held that the directors’ failure to exercise due care had rebutted the business judgment presumption. It remanded for a determination of whether the defendants could nevertheless prove the sale was entirely fair. The Court of Chancery found that they had and again entered judgment for the defendants.

Issues

Issue #1

Whether the directors proved the sale was entirely fair despite their breach of the duty of care.

Holding

Yes. The flawed approval process rebutted the business judgment presumption but did not establish liability; the defendants proved that the transaction, considered as a whole, was entirely fair.

Reasoning

Once the business judgment presumption was rebutted, the directors bore the burden of proving both fair dealing and fair price. The inquiry is unified: a process flaw matters, but it does not automatically make the transaction unfair.

The Court of Chancery properly considered the directors’ loyalty as part of fair dealing. Under a standard focused on each actual director, it found only Sullivan had a material conflict, which he disclosed. Ryan’s assumed interest was immaterial, and neither director dominated the largely independent board.

The directors’ failure to test the market was a serious defect. But the board also considered whether the bid was the best available, relied on financial and legal advisers, and negotiated at arm’s length to raise the offer from $15 to $23 per share. The agreement did not prevent Technicolor from responding to a competing bidder.

The court found no material disclosure violation. More than 75 percent of Technicolor’s shares were tendered, which provided evidence of fairness, though it did not by itself resolve the entire-fairness inquiry.

Substantial evidence supported the finding that $23 was the highest value reasonably available: it was a large premium over the market price, informed major shareholders sold at that price, and no rival bidder emerged. The Court of Chancery found Cinerama’s evidence of a higher obtainable price unpersuasive.

The Court of Chancery weighed the deficient market check against the other evidence of fair dealing and fair price rather than demanding a perfect process. Because its findings were supported by the record and followed a logical analysis, the Supreme Court affirmed its entire-fairness determination.