Where the entire fairness standard is applicable to a corporate law dispute, there are two aspects to the inquiry:
... fair dealing and fair price. The former embraces questions of when the transaction was timed, how it was initiated, structured, negotiated, disclosed to the directors, and how the approvals of the directors and the stockholders were obtained. The latter aspect of fairness relates to the economic and financial considerations of the proposed merger, including all relevant factors: assets, market value, earnings, future prospects, and any other elements that affect the intrinsic or inherent value of a company's stock.... However, the test for fairness is not a bifurcated one as between fair dealing and price. All aspects of the issue must be examined as a whole since the question is one of entire fairness.
Cinerama, Inc. v. Technicolor, Inc., 663 A.2d 1156, 1162–63 (Del. 1995).
I have frequently therefore pondered the question of what happens if there the court concludes that the defendants acted unfairly but that they nevertheless (perhaps by accident or sheer stupidity) ended up paying a fair price. Because this is not a bifurcated test, it seems like could there be damages for the unfair dealing, but if they paid a fair price how would you calculate those damages? The answer is complicated by the court's holding in Cinerama that "the measure of damages for any breach of fiduciary duty, under an entire fairness standard of review, is not necessarily limited to the difference between the price offered and the true value as determined under the appraisal proceedings. Under Weinberger, the [Court of Chancery] may fashion any form of equitable and monetary relief as may be appropriate, including rescissory damages." Id. at 1166 (internal quotation marks removed).
It seems a friend and fellow corporate law professor has been pondering the same sort of questions, as she sent along the following question via email:
Have you thought about how damages are computed where what's violated is a process? The only case I have found on the point is one where the court says "entire fairness applied, there was fair price but not fair dealing, we'll figure out some sort of remedy maybe via fee-shifting." But I haven't seen anything else. Assuming a Revlon breach--let's say pre-Corwin, or Corwin cleansing isn't available, how would one compute, say, what the price would have been with a better process?
I'm not sure which case she's referring to. But I would begin by disentangling two questions. First, what happens if there is a Revlon claim to which Corwin cleansing is unavailable. (If you need to know more about what Revlon claims entail or how Corwin cleansing works, you need my book, Mergers & Acquisitions.)
As I understand the law, where a Revlon claim is found because the board used a flawed sale process, the damage remedy would be determined using quasi-appraisal. In RBC Capital Markets, LLC v. Jervis, 129 A.3d 816 (Del. 2015), for example, the court held that:
The Court of Chancery concluded that the “quasi-appraisal value for Rural as of the Merger date [was] $21.42 per share. The members of the Class received $17.25 in the Merger and therefore suffered damages of $4.17 per share.” It also determined, in Rural I, that “exclusive reliance on the negotiated deal price [was] inappropriate” in its attempt to determine damages, in part, because, “[w]hen the sale process started, the market did not understand Rural's prospects.” Further, the trial court determined that “RBC's faulty [sale process] design prevented the emergence of the type of competitive dynamic among multiple bidders that is necessary for reliable price discovery.... If RBC had not run the Rural process in parallel with the EMS process, other private equity players with ... large funds [equal to that of Warburg] could have participated, forcing up the price.” Similarly, the competitive dynamic was inhibited by the fact that potential strategic bidders for Rural were themselves tied up in change of change of control transactions at the time the Company was exploring a sale.
In Americas Mining Corp. v. Theriault, we explained that, “[i]n making a decision on damages, or any other matter, the trial court must set forth its reasons. This provides the parties with a record basis to challenge the decision. It also enables a reviewing court to properly discharge its appellate function.” Here, the Court of Chancery explained the reasons for its calculation of damages in great detail. The trial court applied the quasi-appraisal remedy to conclude that Rural's stockholders were denied $4.17 per share in the Warburg deal. In addition to an actual award of monetary relief, the Court of Chancery had the authority to grant pre- and post-judgment interest, and to determine the form of that interest. Here, the court below awarded pre- and post-judgment interest at the legal rate, running from June 30, 2011 until the date of payment.
The record reflects that the Court of Chancery properly exercised its broad discretionary powers in fashioning a remedy and making its award of damages. The trial court's judgment awarding damages is, accordingly, affirmed.
Id. at 868. See also Eric L. Talley, Finance in the Courtroom: Appraising Its Growing Pains Increasingly Complex and Technical M&A Economic Tools Have Become Essential in the Modern Courtroom, 35 Del. Law. 16, 18 (Summer 2017) (observing that the Chancery Court has frequently resisted enjoining a deal on Revlon grounds (thereby side-stepping auction theory) if the transaction is also eligible for appraisal or quasi-appraisal later on (where valuation takes center stage)”).
Of course, "Corwin largely shut the door to most post-closing damages and quasi-appraisal claims." Alex Peña & Brian JM Quinn, Appraisal Confusion: The Intended and Unintended Consequences of Delaware's Nascent Pristine Deal Process Standard, 103 Marq. L. Rev. 457, 468 (2019). Corwin did so in part because Revlon and the other enhanced scrutiny cases "were not tools designed with post-closing money damages claims in mind. " Corwin v. KKR Fin. Holdings LLC, 125 A.3d 304, 312 (Del. 2015).
Revlon, of course, is not an entire fairness standard. Rather, Revlon is an aspect of intermediate review a.k.a. enhanced scrutiny. "Thus, although the level of judicial scrutiny under Revlon is more exacting than the deferential rationality standard applicable to run-of-the-mill decisions governed by the business judgment rule, at bottom Revlon is a test of reasonableness; directors are generally free to select the path to value maximization, so long as they choose a reasonable route to get there." In re Dollar Thrifty Shareholder Litig., 14 A.3d 573, 595–96 (Del. Ch. 2010).
Turning to entire fairness, MFW has provided a route for cleansing many of these cases. (MFW and Corwin have a lot in common, as both provide for cleansing of conflicted interest transactions.) But let's assume there has been no cleansing.
Recall that entire fairness is not a bifurcated test. As such, it is (probably) improper for a court to say "well, I found unfair dealing but by some miracle the defendants paid a fair price, so no harm, no foul."
I base this on that Delaware Supreme Court's explanation that “[e]vidence of fair dealing has significant probative value to demonstrate the fairness of the price obtained.” Americas Mining Corp. v. Theriault, 51 A.3d 1213, 1244 (Del. 2012). My sense is that a court that finds unfair dealing will have a thumb on the scale of finding an unfair price. After all, because "the entire fairness analysis is not a bifurcated one as between fair dealing and fair price," "[a]ll aspects of the issue must be examined as a whole since the question is one of entire fairness." Id. (internal quotation marks removed).
In the related context of directors' conflict of interest transactions, former Vice Chancellor Strine explained that:
On the record before me, I obviously cannot conclude that HMG received a shockingly low price in the Transactions or that the prices paid were not within the low end of the range of possible prices that might have been paid in negotiated arms-length deals. In that narrow sense, the defendants have proven that the price was “fair.” But that proof does not necessarily satisfy their burden under the entire fairness standard. As the American Law Institute corporate governance principles point out:
A contract price might be fair in the sense that it corresponds to market price, and yet the corporation might have refused to make the contract if a given material fact had been disclosed.... Furthermore, fairness is often a range, rather than a point, so that a transaction involving a payment by the corporation may be fair even though it is consummated at the high end of the range. If an undisclosed material fact had been disclosed, however, the corporation might have declined to transact at that high price, or might have bargained the price down lower in the range.
The defendants have failed to persuade me that HMG would not have gotten a materially higher value for Wallingford and the Grossman's Portfolio had Gray and Fieber come clean about Gray's interest. That is, they have not convinced me that their misconduct did not taint the price to HMG's disadvantage.
HMG/Courtland Properties, Inc. v. Gray, 749 A.2d 94, 116–17 (Del. Ch. 1999) (citations omitted). Gray and Fieber were directors of HMG. HMG was considering some major transactions. Unbeknownst to the rest of HMG's board, Gray and Fieber had serious conflicts of interest in connection with the proposed transaction. Strine concluded that, as a result, "[t]he process was thus anything but fair." Id. at 115. So, Strine put his thumb on the scale of saying that even though the price may have been fair in a technical sense, he believed that "had Gray disclosed his interest, ... HMG would have terminated his involvement in the negotiations and have taken a much more traditional approach to selling the affected properties. To the extent that HMG continued to consider a sales transaction, I believe it would have commissioned new appraisals and would have sought purchasers other than Fieber." Id. at 118 (citation omitted).
Remember, there is no such thing as "a" fair price. There is a "range" of fair prices. See Norton v. K-Sea Transp. Partners L.P., 67 A.3d 354, 367 (Del. 2013) (noting that "a limited partnership's value is not a single number, but a range of fair values"). As Chancellor William Allen explained: The value of a corporation is not a point on a line, but a range of reasonable values, and the judge's task is to assign one particular value within this range as the most reasonable value in light of all of the relevant evidence and based on considerations of fairness." Cede & Co. v. Technicolor, Inc., CIV.A. 7129, 2003 WL 23700218, at *2 (Del. Ch. Dec. 31, 2003), aff'd in part, rev'd in part, 884 A.2d 26 (Del. 2005).
Hence, my view that a judge who finds unfair dealing is likely to select a "particular" value within the range of fair values that would exceed whatever price the plaintiffs got in the transaction and, as a result, award damages.
Update: The friend who posed the question identified In Re Nine Systems Corporation Shareholders Litigation, C.A. No. 3940-VCN, 2014 WL 4383127 (Del. Ch. Sept. 2014), as the case in question. I think it supports my interpretation:
The board decisions and stockholder actions at the heart of this lawsuit present one of the long-standing puzzles of Delaware corporate law: for a conflicted transaction reviewed by this Court under the entire fairness standard, “[t]o what else are shareholders entitled beyond a fair price?” The entire fairness standard of review has long mandated a dual inquiry into “fair dealing and fair price” that this Court should weigh as appropriate to reach a “unitary” conclusion on the entire fairness of the transaction at issue. Delaware courts have contemplated this issue before.4 What unites the resulting range of explications of this area of Delaware law is the principle that the entire fairness standard of review is principally contextual. That is, there is no bright-line rule on what is entirely fair.
Here, the Court concludes that a price that, based on the only reliable valuation methodologies, was more than fair does not ameliorate a process that was beyond unfair. At least doctrinally, stockholders may be entitled to more than merely a fair price, but the difficulty arises in quantifying the value of that additional entitlement.
Id. at *1 (footnotes omitted).
The court went on to observe that:
Here, the Court is reluctant to conclude that the Recapitalization, even if it was conducted at a fair price, was an entirely fair transaction because of the grossly inadequate process employed by the Defendants....
If the oft-repeated holding of the Delaware Supreme Court’s decision in Weinberger regarding the entire fairness standard—that the analysis is not bifurcated but is to be a unitary conclusion—has any purchase, then, even if the fair price component “may be the preponderant consideration” for most nonfraudulent decisions or transactions, it must hold true that a grossly unfair process can render an otherwise fair price, even when a company’s common stock has no value, not entirely fair. It is not unprecedented for this Court to conclude that a price near the low end of a range of fairness, coupled with an unfair process, was not entirely fair. After a careful and reflective weighing of the procedural and substantive fairness of the Recapitalization, the Court concludes that the Defendants (other than Dwyer and CFP) have not carried their burden of proof. Those Defendants breached their fiduciary duties because the Recapitalization was not entirely fair. ...
Id. at *47 (footnotes omitted).
But the court concluded that the remedy would be merely an award of fees:
As the Plaintiffs’ theories demonstrate, it is difficult to assess damages for the unfair Recapitalization in January 2002, when the fair price of the Company’s equity was zero, without reference to (and a fair bit of bias from) the $175 million Akamai Merger in November 2006. It is likewise difficult to conclude that disloyal conduct when the Company’s equity was worth nothing should now be remedied by an award of damages in the tens (or hundreds) of millions of dollars, especially where the trial record strongly suggests that it was Snyder’s management of NaviSite SMG’s Stream OS business—not the Company’s legacy business—that drove the Company’s growth after the Recapitalization. In other words, but for the Recapitalization, there is little evidence to suggest that the Company would have been worth any amount approaching what the Plaintiffs seek in damages. For these and related reasons, because the unfair Recapitalization was nonetheless effected at a fair price in which the Plaintiffs’ stock had no value, the Court concludes, in its discretion, that it would be inappropriate to award disgorgement, rescissionary, or other monetary damages to the Plaintiffs “because of the speculative nature of the offered proof.
”That is not to say, however, that the Plaintiffs are wholly without a remedy. Based in part on its inherent equitable power to shift attorneys’ fees and its statutory authority to shift costs, this Court has exercised its discretion and concluded that, even where a transaction was conducted at a fair price, a finding that the transaction was not entirely fair may justify shifting certain of the plaintiffs’ attorneys’ fees and costs to the defendants who breached their fiduciary duties.
Id. at *51-52 (footnotes omitted).
