Delaware Chancellor Enters $1.26 Billion Award In Shareholders' Derivative Lawsuit

In an interesting October 14, 2011 post-trial opinion, Delaware Chancellor Leo Strine entered a $1.263 billion award in the Southern Peru Copper Corporation Shareholder Derivative Litigation. The lawsuit relates to Southern Peru's April 2005 acquisition of Minerva México, a Mexican mining company, from Groupo México, Southern Peru's controlling shareholder. Chancellor Strine concluded that as a result of a "manifestly unfair transaction," Southern Peru overpaid for Minerva Mexico. A copy of Chancellor Strine's 106-page opinion can be found here.

Background

Southern Peru is a NYSE company. (After the events involved in this lawsuit, Southern Peru changed its name to Southern Copper Corporation. Its shares trade on the NYSE under the symbol "SCCO.") Groupo México is the controlling shareholder of Southern Peru. In 2004, Groupo México owned 54.17% of Southern Peru's outstanding stock and 63% of the voting power. In February 2004, Groupo México proposed that Southern Peru buy its 99.15% share stake in Minerva in exchange for 72.3 shares of newly-issued Southern Peru stock. At market price of Southern Peru's stock then, the proposed deal had an "indicative" value of $3.05 billion.

The Southern Peru board appointed a special committee to assess the proposed transaction. The special committee in turn hired numerous outside experts, including Goldman Sachs, to assist the committee in assessing the transaction. As Chancellor Strine later concluded, when it became clear that Minerva's value was substantially less than the value of proposed amount of Southern Peru stock, "the special committee and its financial advisor instead took strenuous efforts to justify a transaction at the level originally demanded by the controller."

As a result, "the controller got what it originally demanded: $3.1 billion in real value in exchange for something worth much, much less -- hundreds of millions of millions of dollars less." Even worse, the special committee agreed to a fixed exchange ratio. Because Southern Peru's stock price rose between the date the parties entered the deal and the date the deal closed, the actual value of the transaction was $3.75 billion. Even though the special committee had the ability to rescind the deal, the special committee did not seek to update the fairness opinion or otherwise alter the transaction. The upshot was that "a focused, aggressive controller extracted a deal that was far better than market, and got real, market-tested value of over $3 billion for something no member of the special committee, none of its advisors, and no trial expert was willing to say was worth that amount of actual cash."

Shareholders then filed a derivative lawsuit alleging that the transaction was unfair to Southern Peru and its minority shareholders.

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Read other items of interest from the world of directors & officers liability, with occasional commentary, at the D&O Diary, a blog by Kevin LaCroix.

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