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Wednesday
Jan022013

Delaware's Top Five Worst Shareholder Decisions for 2012 (#4: Americas Mining Corp. v. Theriault) 

Americas Mining is a case that we discussed in multiple posts here, here and here.  It is not one that would at first blush make our top five list.  The case involved allegations that Southern Peru (an exchange traded company) overpaid for the acquisition of a 99% interest in Minera Mexico.  The interest was owned by Grupo Mexico, the controlling shareholder of Southern Peru.  The case probably gained most attention from the fact that the Chancery Court awarded plaintiffs $2 billion in damages and the Supreme Court affirmed the award, although requiring 110 pages to do so. 

The case involved the standard approach employed by the Delaware courts in "protecting" shareholders from transactions involving a conflict of interest. This typically entails a special committee of independent directors, the retention of independent advisors, and genuine deliberations.  Yet in this case these procedures were not enough. 

Because the transaction involved a controlling shareholder (Grupo Mexico), the board of Southern Peru dutifully formed a Special Committee consisting entirely of independent directors.   The directors included a former attorney at Wachtell, a Ph.D in finance from Wharton, the manager of "multi-billion dollar companies such as Grupo Televisa and AeroMexico Airlines, a former Mexican government official who co-founded an investment bank.  In other words, it was a highly qualified group of directors. Moreover, the Special Committee hired independent advisors, including Goldman Sachs and Latham & Watkins.  The Committee also hired a specialized mining consultant. 

The actual negotiations involved some back and forth.  Grupo Mexico wanted $3.147 billion in Southern Peru stock in return for the interest in Minera.  A presentation by Goldman suggested that the value of Minera was somewhere around $1.7 billion.  A subsequent presentation by Goldman valued the shares of Southern Peru that would be exchanged for the interest in Minera at $2.06 billion, an amount less that the current market value of the shares. As the Court noted: 

What Goldman was basically telling the Special Committee was that Southern Peru was being overvalued by the stock market. That is, Goldman told the Special Committee that even though Southern Peru’s stock was worth an obtainable amount in cash, it really was not worth that much in fundamental terms. Thus, although Southern Peru had an actual cash value of $3.19 billion, its “real,” “intrinsic,” or “fundamental” value was only $2.06 billion, and giving $2.06 billion in fundamental value for $1.7 billion in fundamental value was something more reasonable to consider.

The directors made a counter offer to Grupo Mexico.  Matters remained far apart and, as the Court noted, "negotiations almost broke down."  Grupo, however, countered with a lower price, asking for 67 million shares worth that were at the time of the offer worth $2.76 billion.  The Special Committee, after another presentation from Goldman, countered at 64 million shares.

Grupo rejected the counter.  Ultimately, the Special Committee agreed to the 67 million share offer from Grupo but obtained from Grupo the approval of a $100 million dividend by Southern Peru, lowering the company's value.  Goldman ultimately opined that the merger was fair from a financial perspective and issued the requisite fairness opinion.  More than 90% of the shareholders voted for the merger.

Based upon the requirements of Delaware law, the process between the Special Committee and Grupo looked almost flawless.  There was a committee of highly qualified independent directors.  There were independent advisors of the highest caliber.  There were negotiations back and forth between the Special Committee and Grupo.  Indeed, the negotiations were spirited enought that they almost broke down. The Special Committee received a fairness opinion from Goldman and shareholders overwhelmingly approved the transaction.  If ever there was an example of "fair dealing," this was it.

Yet the Chancery Court decided that the applicable test was whether the Special Committee was “well functioning".  In other words, the court wolud "look back at the substance, and efficacy, of the special committee’s negotiations, rather than just a look at the composition and mandate of the special committee."  In this particular case, the Chancery Court found that "although the independence of the Special Committee was not challenged, 'from inception, the Special Committee fell victim to a controlled mindset and allowed Grupo Mexico to dictate the terms and structure of the merger.'”

The evidence of the controlled mindset?  Mostly that the Special Committee entered into what the Chancery Court viewed as an "inexplicable" deal.  See Id.  ("The Court of Chancery concluded '[a] reasonable third-party buyer free from a controlled mindset would not have ignored a fundamental economic fact that is not in dispute here—in 2004, Southern Peru stock could have been sold for [the] price at which it was trading on the New York Stock Exchange.'”). 

The use of the term "controlled mindset" suggested that there was something unusual going on in this particular transaction.  But, in fact, that is likely not the case.  Southern Peru put in place an almost flawless set of procedures.  There was no evidence of actual influence by Grupo.  Yet the Special Committee, in the eyes of the Chancery Court, approved a deal that was excessively favorable to the controlling shareholder. 

What this case shows is that even with Delaware court approved process, there is no guarantee that shareholders will be treated fairly.  Yet process has become the mantra of the Delaware courts.  Whether a poision pill (as in Air Products) or severence packages paid to a departing CEO (as in Zucker), courts in Delaware typically look no further than the process used.  If the board relied on independent, informed directors (as the board did in Americas Mining), shareholders invariably see their suit dismissed. 

Yet Americas Mining shows that there are is doubt as to whether the Delaware approved process actually protects shareholders.  Perhaps the definition of director independence is not sufficiently rigorous.  Perhaps the independence of consultants should be determined only after consideration of all relevant factors, something now rquired for compensation committees of listed companies hiring consultants.  See 17 CFR 240.10C-1. 

What Americas Mining ought to have done was spurred a reexamination by the Delaware courts of reliance on process to protect shareholders.  Yet it did not.  There was absolutely no evidence of introspection or willingness by the Delaware courts to reexamine this approach. 

Some primary materials from the Chancery Court are posted on the DU Corporate Governance web site.

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    theRacetotheBottom - Home - Delaware's Top Five Worst Shareholder Decisions for 2012 (#4: Americas Mining Corp. v. Theriault)

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