Tom, Reddy & Spaeth on "Entire Fairness" in Cede & Co.

Tom, Reddy & Spaeth on "Entire Fairness" in Cede & Co.


The courts will use the standard of "entire fairness" to evaluate the decisions of a board where the plaintiff has rebutted the presumption of the business judgment rule by proving a breach of fiduciary duties. In this Analysis, Rosyln Tom, Neil T. Reddy, and Mr. Ed Spaeth discuss the ruling in Cinerama, Inc. v. Technicolor, 663 A.2d 1156 (Del. 1995) and provide practice tips to assist boards in making decisions under the "entire fairness" standard. They write:
 
     In Cinerama, Inc. v. Technicolor, Inc., the Delaware Supreme Court held in the case of a sale transaction where the stockholder plaintiff has proven a breach of fiduciary duties by the directors, the Court must review the transaction under the entire fairness standard. The entire fairness standard requires the directors to demonstrate that the transaction was the product of (1) fair dealing and (2) fair price. The Court will look at both of these factors in conjunction in order to determine the entire fairness of the transaction.
 
     . . . .
 
     In affirming the Chancery Court's findings on entire fairness, the Supreme Court explained that the rebuttal of the presumption of the business judgment rule by the plaintiff did not create per se liability for the board; instead, such rebuttal shifted the burden of proof to the board to demonstrate the entire fairness of the transaction. In order to meet this burden of demonstrating the entire fairness, the Supreme Court explained that the director defendants must show that the transaction reflected both fair dealing and a fair price. The Supreme Court also explained that in order to establish the entire fairness of the transaction, these components must be tested on a non-bifurcated basis, and that all aspects of the issue must be examined as a whole since the question is one of entire fairness. The Supreme Court then reviewed the entire fairness analysis of the Chancery Court.
 
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Entire Fairness Determination
 
     In reviewing the transaction as a whole, the Supreme Court found that the board's gross negligence in making an uninformed decision to approve the transaction and its failure to make a market check was outweighed by the board's fulfillment of its other duties. As a result, the Supreme Court affirmed the Chancery Court's holding that the price achieved and the process followed by the board was entirely fair to Cinerama with respect to both the tender offer and cash-out merger.
 
     The Supreme Court weighed the finding of the board's gross negligence in failing to conduct a market check, against the other findings concerning the board's proper conduct. The Supreme Court indicated that the Court of Chancery meticulously considered and weighed each aspect of fair dealing and fair price that the board had properly discharged, in accordance with its fiduciary duties, against the board's failure to test the market. After finding that the price obtained was the highest price reasonably available, the Court of Chancery concluded that the transaction was entirely fair.
 
(footnotes omitted)