Cinerama, Inc. v. Technicolor, Inc.

Supreme Court of Delaware · Corporations

Corporationsfiduciary dutiesbusiness judgment ruleentire fairnessduty of loyaltyduty of disclosuremergersbusiness judgment rule

Facts

Technicolor was sold to MAF in a two-stage tender offer and merger for $23 per share in cash, and Cinerama, a 4.405% shareholder, dissented and pursued appraisal and a separate fiduciary-duty action. Earlier proceedings established that the board had been grossly negligent in failing to make a market check before approving the sale, which rebutted the business judgment rule and required an entire fairness review. On remand, no additional evidence was presented, and the Court of Chancery considered loyalty questions involving alleged director conflicts, disclosure, the charter's unanimity provision, and whether the transaction was entirely fair. The Court of Chancery concluded that only Sullivan had a material conflict, that it was disclosed, that the board was largely disinterested and independent, and that the $23 price was the highest value reasonably available.

Issue

Whether, after the business judgment rule had been rebutted by a duty-of-care breach, the Court of Chancery properly followed the remand mandate, resolved the loyalty issues, and correctly concluded that the Technicolor sale was entirely fair. Relatedly, the court considered what standards govern director material self-interest, board independence, and the role of the charter's unanimity provision within the entire fairness analysis.

Rule

If a shareholder rebuts the business judgment rule by showing that the board breached any one of its fiduciary duties of good faith, loyalty, or due care, the burden shifts to the directors to prove entire fairness. Entire fairness is a unified standard comprising fair dealing and fair price; in a sale-of-company case, fair price requires showing that the price offered was the highest value reasonably available under the circumstances. Rebuttal of the business judgment rule does not itself establish liability, and a minority director's material self-interest affects board independence only if that director controls or dominates the board, or fails to disclose the interest and a reasonable board member would find it significant.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

The board of Lakefront Imaging, a Delaware corporation based in Cleveland, approved a cash merger with a private acquirer. In later litigation, a shareholder proves the directors were grossly negligent because they approved the deal after only a brief meeting and without reviewing key valuation materials, but the record also shows arm's-length bargaining and substantial evidence that the price matched the highest value reasonably available.

What is the strongest statement of the board's legal position?

Explanation. Under the majority opinion, proof that the board breached any one fiduciary duty, including due care, rebuts the business judgment rule and shifts the burden to the directors to prove entire fairness. But that burden shift is not per se liability; directors can still avoid liability by proving the transaction was entirely fair. (Derived from Cinerama, Inc. v. Technicolor, Inc. (n.d.).)