Americas Mining Corporation v. Michael Theriault: Delaware Supreme Court Upholds Unprecedented Damages Award and Attorneys' Fees | Practical Law

Americas Mining Corporation v. Michael Theriault: Delaware Supreme Court Upholds Unprecedented Damages Award and Attorneys' Fees | Practical Law

The Delaware Supreme Court in Americas Mining Coroporation v. Michael Theriault affirmed the October 2011 Delaware Court of Chancery's record-setting award of damages of more than $2 billion and $304 million in attorneys' fees when it held that the controlling stockholder defendants breached their fiduciary duty of loyalty in a transaction involving the controlling stockholder’s subsidiary. The Court of Chancery's award, in the stockholder derivative action In re Southern Peru Copper Corp., remains the largest award handed down by the Court of Chancery to date.

Americas Mining Corporation v. Michael Theriault: Delaware Supreme Court Upholds Unprecedented Damages Award and Attorneys' Fees

by PLC Corporate & Securities
Published on 30 Aug 2012 • Delaware, USA (National/Federal)
The Delaware Supreme Court in Americas Mining Coroporation v. Michael Theriault affirmed the October 2011 Delaware Court of Chancery's record-setting award of damages of more than $2 billion and $304 million in attorneys' fees when it held that the controlling stockholder defendants breached their fiduciary duty of loyalty in a transaction involving the controlling stockholder’s subsidiary. The Court of Chancery's award, in the stockholder derivative action In re Southern Peru Copper Corp., remains the largest award handed down by the Court of Chancery to date.
On August 27, 2012, the Delaware Supreme Court in Americas Mining Corporation v. Michael Theriault affirmed the decision of the Delaware Court of Chancery awarding damages of more than $2 billion and $304 million in attorneys' fees (see Legal Update, In re Southern Peru Copper: Court of Chancery Grants $1.263 Billion Award in Fiduciary Duty Case with Controlling Stockholder). In the lower court case, In re Southern Peru Copper Corp. Shareholder Derivative Litigation, Chancellor Strine determined that the controlling stockholder defendants breached their fiduciary duty of loyalty in a transaction involving the controlling stockholder's subsidiary. Finding that the transaction failed the entire fairness standard of review and that Southern Peru overpaid by more than $1 billion when it acquired the controlling stockholder's subsidiary, the damages granted in this case remain the largest award handed down by the Court of Chancery to date.

Background

On October 14, 2011, the Delaware Court of Chancery issued an opinion in In re Southern Peru Copper Corp. Shareholder Derivative Litigation, firmly reminding company boards considering a transaction with a controlling stockholder of the importance of the transaction being entirely fair to the company and its minority stockholders. Chancellor Strine found that the controlling stockholder defendants breached their fiduciary duty of loyalty in a transaction involving the controlling stockholder's subsidiary (see Practice Note, Fiduciary Duties of the Board of Directors). While the board of Southern Peru created a special committee to evaluate the proposed transaction with the controlling stockholder, Chancellor Strine found significant shortcomings on the part of the committee when assessing whether the transaction was subject to a fair process and had a fair price. For a summary of the specific facts of In re Southern Peru Copper Corp., see Legal Update, In re Southern Peru Copper: Background.
Finding that Southern Peru overpaid by more than $1 billion when it acquired the controlling stockholder's subsidiary, the Court of Chancery awarded the plaintiffs what it determined to be the amount of its overpayment (plus pre- and post-judgment interest at the statutory rate) for a total judgment of $2.0316 billion dollars. The Court of Chancery also awarded plaintiff's counsel attorneys' fees and expenses in the amount of 15% of the judgment, totaling over $304 million.
In March 2012, Grupo Mexico, S.A.B. de C.V. (the controlling stockholder in the original case, appearing as Americas Mining Corporation in the appeal) and the other defendants appealed the post-trial decision of the Court of Chancery. On August 27, 2012, the Delaware Supreme Court affirmed the lower court's decision, determining that all of the defendants' claims lacked merit.

Key Litigated Issues

On appeal, the defendants raised five issues, arguing that the Court of Chancery:
  • Impermissibly denied the defendants an opportunity to present testimony from a representative of Goldman Sachs (financial advisor to the special committee) explaining its valuation process.
  • Committed reversible error by failing to determine which party bore the burden of proof before trial and ultimately allocating the burden to the defendants despite the existence of what they claimed was an independent and well-functioning special committee.
  • Made an arbitrary and capricious determination of the "fair" price of the transaction.
  • Awarded damages that were based on speculation and conjecture and not supported by evidence in the record.
  • Abused its discretion by awarding attorney's fees of over $304 million.

Burden of Proof

On appeal the defendants claimed that they should not have borne the burden of proof to demonstrate that the transaction was entirely fair. They argued that the burden should have shifted to the plaintiffs to prove that the transaction was unfair. When a controlling shareholder is on both sides of a transaction, as was the case in the Southern Peru deal, it is well settled that a Delaware court will review the transaction with enhanced scrutiny under the entire fairness standard instead of giving the directors the benefit of the business judgment rule analysis. Under the entire fairness standard, defendants must prove that both the process (negotiation and approval) and price were fair.
The Delaware Supreme Court highlighted that the burden of proof may shift to the plaintiffs if the transaction was approved by at least one of the following:
  • A well-functioning committee of independent directors.
  • An informed vote of a majority of the minority stockholders.
While the Delaware Supreme Court acknowledged that the party bearing the burden of proof should be determined before trial if possible, it clearly noted that in this case the question of burden shifting involved a fact-intensive analysis into the true nature of the special committee, which analysis may not be able to take place until after all of the facts are presented during trial. Accordingly, the Delaware Supreme Court held that "...if the record does not permit a pretrial determination that the defendants are entitled to a burden shift, the burden of persuasion will remain with the defendants throughout the trial to demonstrate the entire fairness of the interested transaction."
In dicta, the Delaware Supreme Court stated that there was nothing in the record to show that there would have been a different outcome in the case if either:
  • The burden of proof had shifted to the plaintiffs.
  • The defendants had been made aware that the burden would remain with them throughout the trial.
While the appellants suggested in their appellate brief that Chancellor Strine's decision not to shift the burden of proof to the plaintiffs in light of the existence of a special committee could influence future board's considerations of whether to form a special committee, the Delaware Supreme Court emphasized that the benefit of the burden shift is usually insignificant and a fair process usually results in a fair price which promotes judicial confidence in the entire fairness of the transaction price.

Award of Damages and Attorneys' Fees

The Delaware Supreme Court affirmed the Court of Chancery's calculation of damages, including its award of attorney's fees. It noted that the Court of Chancery explained its calculations of damages in meticulous detail and properly exercised its power to award damages based on the difference in value between what was paid in the transaction and the value received (a "give-get" analysis), as well as pre- and post- judgement interest.
In their appeal, the defendants also argued that the Court of Chancery abused its discretion in awarding attorneys' fees by focusing too much on the benefit achieved, while failing to assess the reasonableness of the award. The defendants claimed that the fee award was unreasonable on the basis that it had paid out more than $35,000 per hour worked (66 times the value of the attorneys' time and expenses). The defendants also argued that the Court of Chancery erred in allowing the plaintiff's attorneys to collect fees based in part on almost $700 million in prejudgment interest, but the Delaware Supreme Court rejected these claims.
It ultimately held that the Court of Chancery had not abused its discretion and agreed that the substantial award of attorneys' fees was merited due to the extraordinary benefit that the attorneys achieved. It also found that the Court of Chancery had considered the slow pace of litigation in awarding the fee and the decision to include pre-judgement interest in the determination of benefit was the product of a logical and deductive reasoning process. Finally, the Delaware Supreme Court stressed that courts are not required to use an hourly rate as a benchmark for determining a reasonable fee award but rather the benefit achieved by the litigation should decide the compensation of the plaintiff's counsel in a successful derivative action.

Outcome

The Delaware Supreme Court rejected each of the five arguments raised by the defendants on appeal and upheld the judgment of the Court of Chancery awarding more than $2 billion in damages to the plaintiff and $304 million in attorneys' fees to the plaintiff's attorneys.

Practical Implications

In affirming unprecedented damages and attorneys' fee award levels, the Delaware Supreme Court highlighted the powerful message regarding the importance of transactions being entirely fair to the company and its minority stockholders. Boards of companies considering or engaging in transactions with conflicts that would render them subject to an entire fairness standard of review should not expect that the very act of forming a special committee will shift the burden of proof to the plaintiffs. In cases like this where the facts do not lend themselves to a pre-trial determination of the party that should bear the burden of proof, defendants should assume that the burden of proving entire fairness remains with them.

Court Documents