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E-MailThis post is by Arthur Fleischer Jr. of Fried Frank, Harris, Shriver & Jacobson LLP. This post is part of the Delaware law series, which is co-sponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.
My partner Peter S. Golden has prepared a memorandum discussing the extraordinary remedy ordered by the Delaware Chancery Court in the recent decision of In Re Loral Space and Communications Inc. Consolidated Litigation. Finding that the terms of $300 million of convertible preferred stock issued by Loral Space and Communications Inc. to its controlling stockholder were unfair, the Court fashioned a remedy by converting the preferred stock into non-voting common stock based upon a court-determined “fair price” for Loral common stock. Although Loral had created a special committee of directors to negotiate the transaction, the Court criticized the committee as a special committee in name only. In Re Loral Space and Communications Inc. Consolidated Litigation demonstrates that controlling stockholders have a strong interest in ensuring that a well-advised committee of truly independent directors represent the interests of public stockholders in any transaction involving the controlling stockholder and the public company it controls.
Applying the entire fairness standard of review because a majority of the Loral board of directors was affiliated with the controlling stockholder, Vice Chancellor Strine found that the Loral preferred stock issuance was neither the result of fair dealing nor priced fairly. With respect to fair dealing, the key issue was whether the Loral Special Committee functioned as an effective proxy for arms-length bargaining. Holding that the Loral Committee did not, Vice Chancellor Strine was critical of almost every aspect of the Special Committee process. The memo, available here, analyzes the decision and highlights the lessons from it for those advising special committees.
One Comment
I like the way Chancellor Strine “redesigned” the stock. But what the decision shows above all is that a special committe dealing with a controlling stockholder is independent only if its members are elected by minority shareholders or by representatives of them. A disinterested special committee is nothing one can really achieve. It is acting either on behalf of the controlling shareholder or on behalf of the minority, the latter it should do.