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The Delaware Supreme Court has decided that where an interested merger is found to be unfair and the corporation's charter has a Del. Code Ann. tit. 8, § 102(b)(7) exculpatory provision, a court must then proceed to identify the breach or breaches of fiduciary duty upon which liability for damages will be predicated in the ratio decidendi of its determination that entire fairness has not been established. That is, when entire fairness is the applicable standard of judicial review, a determination that the director defendants are exculpated from paying monetary damages can be made only after the basis for their liability has been decided.
The present case involved a consolidated statutory appraisal and class actions for breach of fiduciary duty, which arose out of a two-step "going private" acquisition of publicly owned shares of Emerging Communications, Inc. by Innovative Communications Corporation, L.L.C. (“Innovative”), ECM’s majority stockholder. The two-step "privatization" process included a tender offer and then a cash-out merger. A special committee negotiated a price of $ 10 per share and the privatization was recommended and carried out. The plaintiff shareholders of Emerging Communications, Inc. argued that the privatization was not entirely fair to the corporation’s minority shareholders. Moreover, the plaintiffs asserted that the statutory fair value of the corporation at the time of the merger was $ 44.95 per share. A trial on the merits was held and the parties submitted post-trial briefs and other memoranda for the court's consideration.
The court held that the defendants were liable, finding a fair value per share of $ 38, based on use of later projections for a discounted cash flow valuation, a cost of debt input of 6.3 percent, a cost of equity figure that included premiums for hurricane risk and small firm/small stock, but not a super small firm premium, and which did not rely on stock market price or a corporate opportunity claim. Interest was to be at the rate of 6.27 percent, compounded monthly, from the date of merger to the date of judgment. A fair dealing analysis was required, plaintiffs' fiduciary duty claims were not barred, and defendants failed to carry their burden of showing that they engaged in fair dealing. The committee and corporate minority shareholders who voted to approve the merger was not fully informed due to nondisclosures, the minority shareholders were not adequately represented, and various directors and officers were found to have violated their duty of care, loyalty, and/or good faith, rendering them liable.