Mergers & Acquisitions

New Del. Chancery Chief Awards $1.26B in Stock Suit, Raps Wachtell Ex-Partner re 'Unfair' Valuation

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Saying that a special committee used “a series of economic contortions” to justify a Delaware corporation’s plan to pay a premium $3.1 billion price to purchase a company owned by a majority shareholder, the new chief judge of the state’s chancery court has awarded $1.26 billion to the purchaser, Southern Peru Copper Co.

The judgment against Grupo México by Chancellor Leo E. Strine Jr. is the second-largest shareholder derivative award on record, Thomson Reuters News & Insight columnist Alison Frankel reported.

Although Strine dismissed claims against special committee members, he criticized the chairman, former Wachtell Lipton Rosen & Katz partner Harold Handelsman, in a lengthy opinion (PDF) Friday, essentially saying that the lawyer’s representation of a minority owner of Southern Peru influenced his work on the committee. Handelsman now serves as general counsel for that owner, the Pritzker family.

The bottom line, Strine wrote, is that publicly traded Southern Peru paid for Minera México with stock that had a “real, market-tested value of over $3 billion for something that no member of the special committee, none of its advisers, and no trial expert was willing to say was worth that amount of actual cash. Although directors are free in some situations to act on the belief that the market is wrong, they are not free to believe that they can in fact get $3.1 billion in cash for their own stock but then use that stock to acquire something that they know is worth far less than $3.1 billion … In plain terms, the special committee turned the ‘gold’ it was holding in trust into ‘silver’ and did an exchange with ‘silver’ on that basis, ignoring that in the real world the gold they held had a much higher market price in cash than silver. That non-adroit act of commercial charity toward the controller resulted in a manifestly unfair transaction.”

Alan Stone of Milbank Tweed Hadley & McCloy is Grupo México’s lead lawyer. He said today that the company is shocked by the ruling, which Stone described as unsupported by the evidence and inconsistent with Delaware law, and plans to appeal.

“The court held the admittedly independent special committee … to an unrealistic and unachievable standard,” Stone told Thomson Reuters. “Moreover, the court substituted its judgment not only for highly sophisticated board members but also for that of Goldman Sachs.”

Frankel could not reach Handelsman for comment.

Bloomberg and the DealBook blog of the New York Times also have stories.

Related coverage: “Del. Gov Nominates Leo Strine as New Chief Judge for State Chancery Court”

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