In Re: Digex, Inc. Shareholders Litigation

789 A.2d 1176 (Del Ch. 2000)

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Nature of the Case

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Facts

Digex is well positioned in one of the hottest segments of the technology sector-web hosting. Intermedia is in poor financial condition! Intermedia owned 52% of Digex stock and 94% of the voting power. Since early 1999, Intermedia has been considering strategic options to maximize the value of both itself and Digex, including the possible sale of itself or its various holdings. WorldCom and Global Crossing got into a fight to acquire Intermedia Communications. Intermedia also owned Digex, Inc. which was a web hosting business. WorldCom decided to acquire Digex by acquiring Intermedia. WorldCom needed the Digex board to grant WorldCom a waiver of Section 203, Delaware's business combination statute. The Digex board was composed of 4 Intermedia directors and 3 independents. Section 203 prohibits an acquirer of more than 15% of a target’s shares from engaging in certain interested transactions with the target. Prohibited activities include, freeze out mergers for a period of three years unless the target’s board pre-approves the acquirer’s initial acquisition or another exemption applies. The Digex board voted 4-3 to approve the waiver conditioned upon an amendment of its articles to require that Digex independent directors approve any post-acquisition material transaction between WorldCom and Digex. The vote was split exactly on party lines with the 4 Intermedia directors voting against the 3 independent. Ps sued. Ps’ first theory is that Intermedia (D) usurped a corporate opportunity that (allegedly) fairly belonged to Digex by preventing Digex’s sale to the highest bidder. Ps’ second theory is that the Digex board, more specifically the four interested Digex directors, ‘breached a fiduciary duty when they voted to waive the protections afforded Digex by § 203 of the Delaware General Corporate Law. Following the public announcement on September 5, 2000, of the proposed merger between Intermedia and WorldCom, Digex stockholders filed a series of class and derivative stockholder suits. Ultimately, all of the actions were consolidated into this single action, and WorldCom was joined as a party defendant. The court ruled that Ps has demonstrated a reasonable likelihood of success on the merits of the various claims they have made under the rubric of the corporate opportunity theory. It next addressed the Section 203 issues.