Cede & Co. v. Technicolor, Inc.

• Decision Date: 04 May 2005
• Docket Number: No. 357, 2004.,357, 2004.
• Citation: 884 A.2d 26
• Parties: CEDE & CO. and Cinerama, Inc., Petitioners Below-Appellants, v. TECHNICOLOR, INC., Respondent Below-Appellee.
• Court: Supreme Court of Delaware

884 A.2d 26

CEDE & CO. and Cinerama, Inc., Petitioners Below-Appellants, v. TECHNICOLOR, INC., Respondent Below-Appellee.

No. 357, 2004.

Supreme Court of Delaware.

Submitted: January 26, 2005.

Decided: May 4, 2005.

Revised: June 28, 2005.

Robert K. Payson, Esq., Arthur L. Dent, Esq., of Potter, Anderson & Corroon LLP, Wilmington, Delaware, Gary J. Greenberg, Esq. (argued), New York, New York for Appellants.

Thomas J. Allingham, Esq. (argued), Edward B. Micheletti, Esq., James A. Whitney, Esq., of Skadden, Arps, Slate, Meagher & Flom, LLP, Wilmington, Delaware for Appellee.

Before STEELE, Chief Justice, HOLLAND and RIDGELY, Justices. RIDGELY, Justice.

This is an appeal from a final judgment of the Court of Chancery following a retrial of a statutory appraisal action. This matter arises from a cash-out merger of the minority shareholders of Technicolor, Inc. ("Technicolor"), a Delaware corporation. With approval from a majority of Technicolor's shareholders, MacAndrews & Forbes Group Inc. ("MAF") merged its wholly-owned subsidiary, Macanfor Corporation ("Macanfor"), into Technicolor. The only respondent-appellee in this appraisal action is Technicolor, the surviving corporation. The petitioners-appellants are Cinerama, Inc., the beneficial owner of 201,200 shares of Technicolor common stock, and Cede & Company, the record owners of those shares (collectively, "Cinerama"). The Court of Chancery valued each share at $21.98 and entered a judgment in the principal amount of $4,422,376 with pre-judgment and post-judgment interest.

Cinerama raises two arguments for our consideration. First, Cinerama assigns several errors to the Court of Chancery's appraisal of the fair value of its Technicolor shares. Second, Cinerama argues that the Court of Chancery erred, as a matter of law, in awarding post-judgment interest of 10.32% compounded annually from the merger date until only August 2, 1991.

We conclude that the Court of Chancery's valuation model is supported by record evidence and was the product of an orderly and logical deductive process. However, the Court of Chancery's use of a 19.89% discount rate and $21.3 million corporate debt was contrary to the law of the case. A discount rate of 15.28% and $19.9 million corporate debt are required by the law of the case doctrine. This results in a per share value of $28.41 and a judgment in the principal amount of $5,716,092.

We also find the law of the case doctrine governs Cinerama's entitlement to prejudgment interest. Cinerama is entitled to prejudgment interest on this principal amount at 10.32% compounded annually consistent with the initial determination of the Court of Chancery which awarded prejudgment interest until the date of judgment.

Accordingly, we affirm in part, reverse in part, and remand with instructions to enter judgment consistent with this opinion.

I.

This is the sixth appeal by Cinerama relating either to its statutory appraisal proceeding (the "appraisal action") or its shareholder rescissory damages lawsuit for fraud and unfair dealing (the "personal liability action"). As the Court of Chancery correctly noted, the history of this "sempiternal appraisal action" is thoroughly recorded in the annals of Delaware corporate law.¹

In the late summer of 1982, MAF sought to purchase Technicolor. MAF structured a deal where it would make a tender offer of $23 per share for all of the outstanding common stock of Technicolor, followed by a second-step merger with the remaining outstanding shares converted into $23 per share, with Technicolor becoming the wholly owned subsidiary of MAF. On October 29, 1982, the Technicolor Board agreed to the acquisition proposal made by MAF. On that date, the Technicolor Board approved the Agreement and Plan of Merger with MAF, recommended to its stockholders the acceptance of the offer of $23 per share and recommended the repeal of the super majority provision in Technicolor's charter. Technicolor also filed forms 14D-9 and 13D with the Securities and Exchange Commission which reflected those Board actions and recommendations.

In November 1982, MAF commenced an all-cash tender offer of $23 per share to the shareholders of Technicolor.² When the tender offer closed on November 30, 1982, MAF had gained control of Technicolor. By December 3, 1982, MAF had acquired 82.19% of the Technicolor stock. Thereafter, MAF and Technicolor were consolidated for tax and financial reporting purposes.

Between the date the Technicolor Board agreed to MAF's acquisition proposal (October 29, 1982) and the date the merger was accomplished (January 24, 1983), MAF made a strategic decision not to follow the Kamerman Plan. "The Court of Chancery made a factual finding that, `upon acquiring control' of Technicolor, Perelman and his associates `began to dismember what they saw as a badly conceived melange of businesses.'"³ MAF then implemented the Perelman Plan, which would sell off four of Technicolor's unprofitable business units, thereby generating additional cash flow.

The merger was accomplished on January 24, 1983, at which time a cash-out merger occurred, converting all common stock not owned by MAF into the right to receive $23.00 in cash.⁴ Cinerama, dissented from the merger and sought a judicial appraisal of its stock under Delaware's appraisal statute. Cinerama's holdings represented 4.405% of the total shares of Technicolor outstanding. During pretrial discovery in the appraisal proceeding, certain deposition testimony caused Cinerama to believe that the Technicolor Board violated their fiduciary duties in connection with the sale of the company.

As a result, on January 22, 1986, Cinerama filed the personal liability action against Technicolor, seven of the nine members of Technicolor's Board at the time of the merger, MAF, Macanfor and Ronald O. Perelman (collectively, the "defendants"). Cinerama's personal liability action alleged fraud, breach of fiduciary duty and unfair dealing. Cinerama sought, among other things, rescissory damages.⁵ The defendants in the personal liability action filed a motion to dismiss on the ground that Cinerama had no standing to pursue such a claim after petitioning for an appraisal of its shares. The Court of Chancery denied this motion, but later ruled that Cinerama would have to elect which cause of action it intended to pursue.⁶ Cinerama filed an interlocutory appeal to this Court. In that appeal, this Court concluded that the Court of Chancery erred, as a matter of law, in requiring Cinerama to make an election of remedies before trial.⁷ This Court held that Cinerama was entitled to pursue concurrently through trial its appraisal action and its personal liability action.⁸ Both actions were then remanded to the Court of Chancery for a consolidated trial.⁹

Following discovery and an extended trial which lasted 47-days, the Court of Chancery announced its first decision in the appraisal action. In a decision dated October 19, 1990, the Court of Chancery found Technicolor's fair value to be $21.60 under the Kamerman Plan.¹⁰

The Court of Chancery then issued its personal liability opinion, entering a judgment in favor of the defendants. In its opinion dated June 24, 1991, the Court of Chancery held that even if there was persuasive evidence that the Technicolor Board had not exercised due care in approving the merger, Cinerama had failed to prove that it had been damaged.¹¹ In reaching this conclusion, the Court of Chancery relied on its earlier appraisal opinion.

Cinerama appealed from the judgments entered in both the appraisal and personal liability actions. With respect to the personal liability action, this Court affirmed in part, reversed in part, and remanded to the Court of Chancery for an application of the entire fairness standard to the challenged transaction, and to resolve additional issues relating to the duty of loyalty.¹² This Court also noted that Cinerama's appeal of the Court of Chancery's original appraisal decision was "moot" pending its resolution of the companion personal liability action.¹³

On remand, the Court of Chancery concluded that the Technicolor Board met their burden of showing entire fairness.¹⁴ The Court of Chancery entered judgment in favor of the Technicolor Board in the personal liability action. Cinerama then filed its third appeal. This Court affirmed the Court of Chancery's final judgment dismissing the personal liability action.¹⁵ This Court reasoned that there was substantial evidence in the record to support the Court of Chancery's finding that the $23 deal price was the highest price reasonably available.¹⁶ Consequently, the appraisal action that remained in abeyance following this Court's remand in Technicolor II was no longer moot.¹⁷ Therefore, the only remaining issue was for the Court of Chancery to determine the fair value of Cinerama's shares and the appropriate post-judgment interest to be awarded.

The Court of Chancery then entered a Restated Modified Order and Final Judgment in the appraisal action on October 27, 1995. That judgment set the fair value of a share of Technicolor's stock at $21.60. That judgment awarded Cinerama: (I) the principal amount of $4,345,920; (ii) prejudgment interest on that amount at a rate of 10.32% compounded annually from January 24, 1983 (the date of the merger); and (iii) post-judgment interest thereafter, at the rate of 10.5% simple interest, accruing only on the principal award of $4,345,920.

Cinerama then filed its fourth appeal. In addressing Cinerama's appeal of the Court of Chancery's appraisal decision, this Court reversed, finding that the Court of Chancery improperly valued Technicolor.¹⁸ This Court's mandate required the Court of Chancery to value Technicolor "on the merger date as it was then `operating pursuant to the Perelman Plan,'" rather than valuing Technicolor under the Kamerman Plan.¹⁹ The difference between Perelman's Technicolor as of the merger date and Kamerman's...