Am. Mining Corp. v. Theriault

• Decision Date: 21 September 2012
• Docket Number: Nos. 29,2012.,30,2012,s. 29
• Citation: 51 A.3d 1213
• Parties: AMERICAS MINING CORPORATION, et al., Defendants Below, Appellants, v. Michael THERIAULT, as Trustee for the Theriault Trust, Plaintiff Below, Appellee. Southern Copper Corporation, formerly known as Southern Peru Copper Corporation, Nominal Defendant Below, Appellant, v. Michael Theriault, as Trustee for the Theriault Trust, Plaintiff Below, Appellee.
• Court: United States State Supreme Court of Delaware

51 A.3d 1213

AMERICAS MINING CORPORATION, et al., Defendants Below, Appellants,

v.Michael THERIAULT, as Trustee for the Theriault Trust, Plaintiff Below, Appellee.

Southern Copper Corporation, formerly known as Southern Peru Copper Corporation, Nominal Defendant Below, Appellant,

v.Michael Theriault, as Trustee for the Theriault Trust, Plaintiff Below, Appellee.

Nos. 29, 2012, 30, 2012.

Supreme Court of Delaware.

Submitted: June 7, 2012.

Decided: Aug. 27, 2012.

Reargument Denied: Sept. 21, 2012.

Court Below—Court of Chancery of the State of Delaware Consolidated C.A. No. 961.

Upon appeal from the Court of Chancery. AFFIRMED.

S. Mark Hurd, Esquire and Kevin M. Coen, Esquire, Morris, Nichols, Arsht & Tunnell LLP, Wilmington, Delaware, and Bruce D. Angiolillo, Esquire (argued), Jonathan K. Youngwood, Esquire, Craig S. Waldman, Esquire, and Daniel J. Stujenske, Esquire, Simpson, Thacher & Bartlett LLP, New York, New York, for appellants, Americas Mining Corporation, Germán Larrea Mota–Velasco, Genaro Larrea Mota–Velasco, Oscar Gonzalez Rocha, Emilio Carrillo Gamboa, Jaime Fernando Collazo Gonzalez, Xavier Garcia de Quevedo Topete, Armando Ortega Gómez, and Juan Rebolledo Gout.

Stephen E. Jenkins, Esquire (argued), Richard L. Renck, Esquire, Andrew D. Cordo, Esquire and F. Troupe Mickler, IV, Esquire, Ashby & Geddes, Wilmington, Delaware, for appellant, Nominal Defendant Southern Copper Corporation, formerly known as Southern Peru Copper Corporation.

Ronald A. Brown, Jr., Esquire (argued) and Marcus E. Montejo, Esquire, Prickett, Jones & Elliott, P.A., Wilmington, Delaware, and Kessler Topaz Meltzer & Check, LLP, Radnor, Pennsylvania, for appellee.

Before STEELE, Chief Justice, HOLLAND, BERGER and RIDGELY, Justices and VAUGHN, President Judge,¹ constituting the Court en Banc.

HOLLAND, Justice, for the majority:

This is an appeal from a post-trial decision and final judgment of the Court of Chancery awarding more than $2 billion in damages and more than $304 million in attorneys' fees. The Court of Chancery held that the defendants-appellants, Americas Mining Corporation (“AMC”), the subsidiary of Southern Copper Corporation's (“Southern Peru”) controlling shareholder, and affiliate directors of Southern Peru (collectively, the “Defendants”), breached their fiduciary duty of loyalty to Southern Peru and its minority stockholders by causing Southern Peru to acquire the controller's 99.15% interest in a Mexican mining company, Minera México, S.A. de C.V. (“Minera”), for much more than it was worth, i.e., at an unfair price.

The Plaintiff challenged the transaction derivatively on behalf of Southern Peru. The Court of Chancery found the trial evidence established that the controlling shareholder, Grupo México, S.A.B. de C.V. (“Grupo Mexico”), through AMC, “extracted a deal that was far better than market” from Southern Peru due to the ineffective operation of a special committee (the “Special Committee”). To remedy the Defendants' breaches of loyalty, the Court of Chancery awarded the difference between the value Southern Peru paid for Minera ($3.7 billion) and the amount the Court of Chancery determined Minera was worth ($2.4 billion). The Court of Chancery awarded damages in the amount of $1.347 billion plus pre- and post-judgment interest, for a total judgment of $2.0316 billion. The Court of Chancery also awarded the Plaintiff's counsel attorneys' fees and expenses in the amount of 15% of the total judgment, which amounts to more than $304 million.

Issues on Appeal

The Defendants have raised five issues on appeal. First, they argue that the Court of Chancery impermissibly denied the Defendants the opportunity to present a witness from Goldman, Sachs & Co. (“Goldman”) at trial to explain its valuation process, on the grounds that the witness constituted an “unfair surprise.” Second, they contend that the Court of Chancery committed reversible error by failing to determine which party bore the burden of proof before trial. They further claim the Court of Chancery erred by ultimately allocating the burden to the Defendants, because, they submit, the Special Committee was independent, well-functioning, and did not rely on the controlling shareholder for the information that formed the basis for its recommendation. Third, they argue that the Court of Chancery's determination about the “fair” price for the transaction was arbitrary and capricious. Fourth, they assert that the Court of Chancery's award of damages is not supported by evidence in the record, but rather by impermissible speculation and conjecture. Finally, the Defendants' allege that the Court of Chancery's award of attorneys' fees of more than $304 million is an abuse of discretion. Southern Peru also appeals from the award of attorneys' fees to the Plaintiff's counsel.

We have determined that all of the Defendants' arguments are without merit. Therefore, the judgment of the Court of Chancery is affirmed.

FACTUAL BACKGROUND²

The controlling stockholder in this case is Grupo México, S.A.B. de C.V. The NYSE-listed mining company is Southern Peru Copper Corporation.³ The Mexican mining company is Minera México, S.A. de C.V.⁴

In February 2004, Grupo Mexico proposed that Southern Peru buy its 99.15% stake in Minera. At the time, Grupo Mexico owned 54.17% of Southern Peru's outstanding capital stock and could exercise 63.08% of the voting power of Southern Peru, making it Southern Peru's majority stockholder.

Grupo Mexico initially proposed that Southern Peru purchase its equity interest in Minera with 72.3 million shares of newly-issued Southern Peru stock. This “indicative” number assumed that Minera's equity was worth $3.05 billion, because that is what 72.3 million shares of Southern Peru stock were worth then in cash. By stark contrast with Southern Peru, Minera was almost wholly owned by Grupo Mexico and therefore had no market-tested value.

Because of Grupo Mexico's self-interest in the merger proposal, Southern Peru formed a “Special Committee” of disinterested directors to “evaluate” the transaction with Grupo Mexico. The Special Committee spent eight months in an awkward back and forth with Grupo Mexico over the terms of the deal before approving Southern Peru's acquisition of 99.15% of Minera's stock in exchange for 67.2 million newly-issued shares of Southern Peru stock (the “Merger”) on October 21, 2004. That same day, Southern Peru's board of directors (the “Board”) unanimously approved the Merger and Southern Peru and Grupo Mexico entered into a definitive agreement (the “Merger Agreement”). On October 21, 2004, the market value of 67.2 million shares of Southern Peru stock was $3.1 billion. When the Merger closed on April 1, 2005, the value of 67.2 million shares of Southern Peru had grown to $3.75 billion.

This derivative suit was then brought against the Grupo Mexico subsidiary that owned Minera, the Grupo Mexico-affiliated directors of Southern Peru, and the members of the Special Committee, alleging that the Merger was entirely unfair to Southern Peru and its minority stockholders.

The crux of the Plaintiff's argument is that Grupo Mexico received something demonstrably worth more than $3 billion (67.2 million shares of Southern Peru stock) in exchange for something that was not worth nearly that much (99.15% of Minera).⁵ The Plaintiff points to the fact that Goldman, which served as the Special Committee's financial advisor, never derived a value for Minera that justified paying Grupo Mexico's asking price, but instead relied on a “relative” valuation analysis that involved comparing the discounted cash flow (“DCF”) values of Southern Peru and Minera, and a contribution analysis that improperly applied Southern Peru's own market EBITDA multiple (and even higher multiples) to Minera's EBITDA projections, to determine an appropriate exchange ratio to use in the Merger. The Plaintiff claims that, because the Special Committee and Goldman abandoned the company's market price as a measure of the true value of the give, Southern Peru substantially overpaid in the Merger.

The Defendants remaining in the case are Grupo Mexico and its affiliate directors who were on the Southern Peru Board at the time of the Merger. ⁶ These Defendants assert that Southern Peru and Minera are similar companies and were properly valued on a relative basis. In other words, the defendants argue that the appropriate way to determine the price to be paid by Southern Peru in the Merger was to compare both companies' values using the same set of assumptions and methodologies, rather than comparing Southern Peru's market capitalization to Minera's DCF value. The Defendants do not dispute that shares of Southern Peru stock could have been sold for their market price at the time of the Merger, but they contend that Southern Peru's market price did not reflect the fundamental value of Southern Peru and thus could not appropriately be compared to the DCF value of Minera.

After this brief overview of the basic events and the parties' core arguments, the Court of Chancery provided the following more detailed recitation of the facts as it found them after trial.

The Key Players

Southern Peru operates mining, smelting, and refining facilities in Peru, producing copper and molybdenum as well as silver and small amounts of other metals. Before the Merger, Southern Peru had two classes of stock: common shares that were traded on the New York Stock Exchange; and “Founders Shares” that were owned by Grupo Mexico, Cerro Trading Company, Inc., and Phelps Dodge Corporation (the “Founding Stockholders”). Each Founders Share had five votes per share versus one vote per share for ordinary common stock. Grupo Mexico owned 43.3 million Founders Shares, which translatedto 54.17% of Southern Peru's outstanding stock and 63.08% of the voting power.

Southern Peru's certificate of incorporation and a stockholders' agreement also gave Grupo Mexico the right to nominate a majority of the ...