03/11/2011 11:01:00 AM EST
Hallmark Receives Welcome Greeting: Chancery Approves Recapitalization of Affiliate
S. Muoio & Co. LLC v. Hallmark
Entertainment Investments Co., C.A. No.
4729-CC ( Del. Ch. Mar. 9, 2011), read 63-page
Delaware Court of Chancery opinion here. Hat
tip to Wilmington corporate litigator Kurt Heyman for sending me this opinion
today. He and his partners Patricia Enerio and Dominick Gattuso represented
some of the prevailing defendants in this case.
This suit challenged the fairness of a recapitalization of Crown Media
Holdings, Inc. that was orchestrated by Crown's controlling shareholder and
primary debt holder, Hallmark Cards, Inc. Crown's inability to make debt
payments presented it with choice between default on the debt or
bankruptcy--unless the recapitalization plan worked. That plan provided for
Hallmark to exchange its Crown debt for an increased percentage of Crown's
Class A common stock, new preferred stock and a new and far smaller amount of
debt with a longer maturity. Muoio filed this action in July 2009 seeking to
enjon the transaction, a few weeks after it was announced. But the parties
agreed to a stay of the litigation to allow time for a special committee to
consider the recapitalization plan. The parties also agreed that Muoio would be
given sufficient time to pursue a preliminary injunction before the transaction
proceeded. Instead, after notice of the transaction was given, Muoio amended
its complaint to seek rescissory and related damages. Muoio argued,
unsuccessfully, that Crown was undervalued, and that the deal suffered from an
unfair process with an ineffective special committee.
Entire fairness, the parties conceded, was the
appropriate standard of review for the Court to apply. After a four-day trial
in September 2010, and post-trial briefing completed in December 2010, the
court issued this opinion today.
The Court observed that its opinion turned on the
following factual findings:
Crown board's process was not flawed;
special committee was independent and negotiated at arm's length;
could not pay its debts as they became due at the time of the deal and
absent the deal, faced either default or bankruptcy;
valuation issue resulted in a battle of the experts and, as the Court
described it: "plaintiff's expert lost".
Bottom line: The Court
found that the recapitalization was "entirely fair."
Selected Highlights of Legal Principles and
Court's Legal Analysis
Court recognized the well-established principle that "a transaction
between a majority stockholder and the company in which it owns a majority
stake is generally reviewed under the entire fairness standard", and
the party standing on both sides of the transaction bears the burden of
entire fairness standard includes a dual focus on both fair price and fair
the defendant establishes that the challenged transaction was approved
by: (i) an independent committee of directors, or (ii) an
informed majority of the minority, the burden of proof shifts to the
plaintiff. See footnote 73 (if both foregoing protective
devices are used, it could obviate entire fairness review.
did not establish the lack of independence of the directors on the
special committee because no evidence supported the inference that
"because of the nature of a relationship or additional
circumstances..., the non-interested director would be more willing
to risk his reputation than risk the relationship with the interested
director." See slip op., at 26 to 28 for a detailed
discussion of the (lack of) evidence profferred in this
importance of the special committee's charter was emphasized, including
the need to assure the that special committee has full power to negotiate
and evaluate a transaction--including the power to "say no" to
fair price issue was addressed at pages 44 to 48, with reference to prior
Delaware cases that dealt with the value of a company on the brink of
bankruptcy and unable to pay its bills as they became due.
battle of the valuation experts is waged at pages 48 to 63 of the opinion,
with extensive analysis and comparison of the competing experts. The views
of the plaintiff's expert are described by the Court in one instance as
Panglossian (i.e., inappropriately optimistic).
Postscript: As an aside,
regular readers recognize the modest challenge of highlighting a decision of
this length in a manner that does not compete with the opinion itself in
duration. The length of this opinion is not uncommon in Chancery so the typical
practice on these pages has been to provide bullet points or selected
highlights of key provisions and then return later for fuller treatment when
and where appropriate.
Read more Delaware business
litigation case summaries and commentary on Delaware
Corporate and Commercial Litigation Blog, a blog hosted by Francis G.X.
Pileggi, of Fox Rothschild LLP.
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