Cinerama v. Technicolor, Inc.

Supreme Court of Delaware · Corporations

Corporationsfiduciary dutiesbusiness judgment ruleentire fairnessdirector loyaltydirector caredisclosuremergers

Facts

Technicolor was sold to MacAndrews & Forbes Group, Inc. in a two-stage tender offer and merger for $23 per share in cash. Cinerama, a Technicolor stockholder, did not tender in the first stage, dissented from the second-stage merger, and later sued the directors and others for fiduciary breaches connected to the sale. In an earlier appeal, the Delaware Supreme Court held that the board had rebutted the business judgment rule's presumption by breaching its duty of care, which required review under the entire fairness standard, but did not itself establish liability. On remand, without new evidence, the Court of Chancery examined the loyalty issues and the fairness of the transaction as a whole and found the sale entirely fair.

Issue

When the business judgment rule has been rebutted by a board's breach of duty of care, did the Court of Chancery properly apply the entire fairness standard and correctly conclude that Technicolor's sale was entirely fair despite flaws in the board's process? Relatedly, what standard governs material director self-interest and board independence in that 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 defendant directors to prove the transaction's entire fairness. Entire fairness is a unified inquiry into fair dealing and fair price, and in the sale-of-company context the fair-price component requires proof that the price offered was the highest value reasonably available under the circumstances. Rebuttal of the business judgment rule does not create per se liability; liability depends on whether the directors carry their burden of proving entire fairness. For director-interest questions, materiality is judged by a subjective 'actual person' inquiry focused on whether the given director in fact was or likely would be affected by the interest.

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The board of Lakefront Imaging, Inc., a Delaware corporation based in Chicago, approved a cash merger with Harbor Peak Holdings for $41 per share. In a stockholder suit, the court finds the directors approved the deal after a grossly uninformed meeting and therefore rebutted the business judgment rule on duty-of-care grounds, but the record also shows arm’s-length negotiations, no disclosure violation, and strong evidence that $41 was the highest value reasonably available.

What is the strongest statement of the directors’ position after the business judgment rule has been rebutted?

Explanation. Rebutting the business judgment rule shifts the burden to the directors to prove entire fairness, but it does not create per se liability. The majority explained that burden shifting is procedural, not dispositive on the merits. If the directors prove fair dealing and fair price, they can avoid liability despite a care violation. (Derived from Cinerama v. Technicolor, Inc. (n.d.).)