Nature of the Case
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Facts
D was a corporation with a long and prominent history in the film/audio-visual industries. D's core business for over thirty years had been the processing of film for Hollywood movies through facilities in the United States, England, and Italy. D was the most prominent of a handful of companies. By the late 70s D's business was failing. The CEO initiated efforts to reduce costs at D's film laboratories and to eliminate other inefficiencies. Through Kamerman's initiative, in the late seventies D's market share and earnings improved. However, by the early eighties, D's core business earnings had stagnated. Kamerman concluded that Technicolor's principal business, theatrical film processing, did not offer sufficient long-term growth even though it still represented more than fifty percent of Technicolor's net income. Kamerman proposed establishing a network of stores across the country offering one-hour development of film, with quality service at competitive prices. The business, named 'One Hour Photo' (OHP), would require Technicolor to open approximately one thousand stores over the next five years and to invest about $150 million. The board approved the plan. The securities market reacted negatively and D's stock dropped by almost $4 a share; and over the next month no store had been opened. As of August 1982, D had opened only twenty-one of a planned fifty OHP retail stores; and its Board was anticipating a $5.2 million operating loss for OHP in fiscal 1983. D's September financial statements reported an eighty percent decline in consolidated net income--from $17.073 million in fiscal 1981 to $3.445 million in 1982. By September 1982, D's stock had reached a new low of $8.37 after falling by the end of June to $10.37 a share. In the late summer of 1982, Perelman of MacAndrews & Forbes Group (MAF) concluded that D would be an attractive candidate for takeover by MAF. Perelman targeted D for a takeover. Perelman's interest was not then known to any of D's management. On September 17, Sullivan met with Tarnopol and Perelman. Perelman told Sullivan, a D director, that he was interested in acquiring D and would pay about $15 per share. MAF had, since September 10, 1982, been purchasing D stock at market. By September 23, MAF had acquired 186,500 shares of D, representing approximately 3.7 percent of the outstanding stock. Sullivan informed Kamerman of Perelman's interest. Sullivan did not inform Kamerman of Perelman's intent to acquire D stock or that he, Sullivan, had recently increased his holdings in D stock. Neither Kamerman nor Sullivan informed any of their fellow officers and directors of their scheduled meeting with Perelman or of Perelman's interest in acquiring D. On October 4, Kamerman, Sullivan, and Perelman met and Perelman informed Kamerman that MAF would be willing to pay $20 per share. Kamerman reacted negatively and countered that he would not consider the sale of the company or submitting the matter to his board at a price below $25 a share. Kamerman did not inform D's President and Chief Operating Officer, Arthur Ryan (Ryan), also a director, of his meeting with Perelman. Ryan learned of the meeting from outside sources. On October 12, Perelman met with Kamerman in Los Angeles for a second time. Kamerman and Perelman had reached substantial agreement on all matters discussed except price and financing. Kamerman, without consulting with any of his fellow officers or directors, then retained Goldman Sachs (Goldman) as D's investment banker and Meredith M. Brown (Brown), a senior partner at the New York law firm of Debevoise & Plimpton, as its outside legal counsel. Through individual stock purchase agreements with Kamerman and Bjorkman and their spouses, MAF would acquire eleven percent of D's outstanding stock. MAF would have the right to purchase another eighteen percent of D's authorized but unissued stock, exercisable by MAF if another bidder emerged and topped MAF's price. MAF would control about thirty-four percent of the outstanding stock. Taking this evidence into account, along with Technicolor's supermajority charter provision requiring a shareholder vote of ninety-five percent of the outstanding shares for approval of a merger, the Chancellor found a probable 'lock-up' by MAF of D. In further one-on-one private meetings and negotiations between Kamerman and Perelman, they agreed that, if the deal closed, Sullivan should receive a 'finder's fee' of $150,000 for his role in introducing the parties. Kamerman and Perelman also negotiated a post-merger employment contract for Kamerman as Chief Executive Officer of D, a contract that the court found to be significantly different from Kamerman's existing contract. Goldman put together a valuation package; and three days later, on October 21, Goldman told Kamerman by telephone that a price of $ 20 - $ 22 was worth pursuing. However, Goldman also suggested that Kamerman consider other possible purchasers for D. Goldman prepared an LBO model which included both an analysis of D's value and MAF's financial condition. Goldman performed no other financial study. The board convened on October 29 to consider MAF's proposal. Kamerman recommended that MAF's $23 per share offer be accepted in view of the present market value. The board unanimously approved the Agreement and Plan of Merger with MAF and recommended to the stockholders of D the acceptance of the offer of $ 23 per share. The board also unanimously recommended repeal of the supermajority provision of the Certificate of Incorporation. The board approved the Stock Option Agreement, Sullivan's finder's fee, and Kamerman's new employment contract. By December 3, 1982, MAF had acquired 3,754,181 shares, or 82.19%. By December 3, 1982, MAF had acquired 3,754,181 shares, or 82.19%. The Chancellor found that 'the Board as a whole' had not breached its collective duty of loyalty, notwithstanding the court's finding that at least one director, Sullivan, if not a second director, Ryan, had breached his duty of loyalty. The court also found that all the directors had presumably breached their duty of care. The Chancellor found the evidence sufficient to conclude that Sullivan had been disloyal because of his interest in the transaction. The court held that the shareholder, to rebut the rule, was required to prove that the disloyal director either dominated the board or in some way tainted the presumed independence of the remaining board members voting to approve the challenged transaction. Thus, it was P's burden to establish that any director's self-interest was individually, or collectively, so 'material' as to persuade a trier of fact that the independence of the board 'as a whole' had been compromised. Applying this test, the court found that P had not rebutted the business judgment rule's presumption of director independence. The court ruled that P was required to prove that it had suffered a monetary loss from a breach of the duty of care and to quantify that loss. The court expressed 'grave doubts' that the board 'as a whole' had met that duty in approving the terms of the merger/sale of the company. The court, in effect, read into the business judgment presumption of due care the legal maxim that proof of negligence without proof of injury is not actionable. The court also reasoned that a judicial finding of director good faith and loyalty in a third-party, arms-length transaction should minimize the consequences of a board's found failure to exercise due care in a sale of a company. The Chancellor's rationale for subordinating the due care element of the business judgment rule, as applied to an arms-length, third-party transaction, was a belief that the rule, unless modified, would lead to draconian results. The Chancellor left no doubt that he was referring to this Court's decision in Smith v. Van Gorkom. He stated, 'In all, P contends that this case presents a compelling case for another administration of the discipline applied by the Delaware Supreme Court in Smith v. Van Gorkom. On appeal, P asserts that the Chancellor has committed fundamental errors of law in his formulation and application of the business judgment rule's requirements of director duty of loyalty and duty of care. Ds concede the novelty of the Chancellor's reformulation of the rule's duty of care elements for rebutting a business judgment standard of judicial review to require a shareholder plaintiff to establish harm or loss. Ds assert that the Chancellor's reformulation of the duty of loyalty element of the rule to require a director's interest to be 'material' to be disabling is not new law, but simply different terminology. Defendants urge affirmance of all other issues appealed.
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