Cede & Co. v. Technicolor, Inc.

• Decision Date: 22 June 1992
• Citation: 634 A.2d 345
• Court: Supreme Court of Delaware
• Parties: Fed. Sec. L. Rep. P 97,811 CEDE & CO. and Cinerama, Inc., Petitioners Below, Appellants/Cross-Appellees, v. TECHNICOLOR, INC., Respondent Below, Appellee/Cross-Appellant. CINERAMA, INC., a New York corporation, Plaintiff Below, Appellant/Cross-Appellee, v. TECHNICOLOR, INC., a Delaware corporation, Morton Kamerman, Arthur N. Ryan, Fred R. Sullivan, Guy M. Bjorkman, George Lewis, Jonathan T. Isham, MacAndrews & Forbes Group, Incorporated, a Delaware corporation, Macanfor Corporation, and Ronald O. Perelman, Defendants Below. . Submitted:

Page 345

634 A.2d 345

Fed. Sec. L. Rep. P 97,811

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

CINERAMA, INC., a New York corporation, Plaintiff Below, Appellant/Cross-Appellee, v. TECHNICOLOR, INC., a Delaware corporation, Morton Kamerman, Arthur N. Ryan, Fred R. Sullivan, Guy M. Bjorkman, George

Lewis, Jonathan T. Isham, MacAndrews & Forbes Group,

Incorporated, a Delaware corporation, Macanfor Corporation,

and Ronald O. Perelman, Defendants Below.

Supreme Court of Delaware.

Submitted: June 22, 1992.

Decided: Oct. 22, 1993.

Revised: Nov. 1, 1993.

Upon Return to Remand for Clarification Jan. 18, 1994.

Upon appeal from the Court of Chancery. Affirmed in part; Reversed in Part; and Remanded.

Gary J. Greenberg (argued), and Sylvia L. Shapiro, New York City, Peter M. Sieglaff, Robert K. Payson and Arthur L. Dent of Potter, Anderson & Corroon, Wilmington, for petitioners/plaintiff-appellants and cross-appellees Cinerama, Inc. and Cede & Co.

Rodman Ward, Jr. and Thomas J. Allingham II (argued), John G. Day, R. Michael Lindsey, David J. Margules, Mary M. MaloneyHuss, Robert M. Omrod and Jeff A. Shumway of Skadden, Arps, Slate, Meagher & Flom, Wilmington, for respondent-appellee and cross-appellant Technicolor, Inc., in C.A. No. 7129, and defendants-appellees and cross-appellants MacAndrews & Forbes Group, Inc., Macanfor Corp. and Ronald O. Perelman in C.A. No. 8358.

Stephen E. Herrmann of Richards, Layton & Finger, Wilmington, for defendants-appellees and cross-appellants Technicolor, Inc., Morton Kamerman, Arthur N. Ryan, Fred R. Sullivan, Guy M. Bjorkman, George Lewis and Jonathan T. Isham in C.A. No. 8358.

Before HORSEY, MOORE and HOLLAND, JJ.

HORSEY, Justice:

I.

Nature of Case

Prior Proceedings

Summary of Principal Holdings

This appeal from final judgment of the Court of Chancery encompasses consolidated suits: a first-filed Delaware statutory appraisal proceeding (the "appraisal action"), and a later-filed shareholders' individual suit for rescissory damages for "fraud" and unfair dealing (the "personal liability action") brought by plaintiffs, Cinerama, Inc. ("Cinerama"), a New York corporation, and Cede & Co. ("Cede"), the owner of record. The actions stem from a 1982-83 cash-out merger in which Technicolor, Incorporated ("Technicolor"), a Delaware corporation, was acquired by MacAndrews & Forbes Group, Incorporated ("MAF"), a Delaware corporation, through a merger with Macanfor Corporation ("Macanfor"), a wholly-owned subsidiary of MAF. ¹ Under the terms of the tender offer and later cash-out merger, each shareholder of Technicolor (excluding MAF and its subsidiaries) was offered $23 cash per share.

Plaintiff Cinerama was at all times the owner of 201,200 shares of the common stock of Technicolor, representing 4.405 percent of the total shares outstanding. Cinerama did not tender its stock in the first leg of the MAF acquisition commencing November 4, 1982; and Cinerama dissented from the second stage merger, which was completed on January 24, 1983. After dissenting, Cinerama, in March 1983, petitioned the Court of Chancery for appraisal of its shares pursuant to 8 Del.C. § 262. In pretrial discovery during the appraisal proceedings, Cinerama obtained testimony leading it to believe that director misconduct had occurred in the sale of the company. In January 1986, Cinerama filed a second suit in the Court of Chancery against Technicolor, seven of the nine members of the Technicolor board at the time of the merger, MAF, Macanfor and Ronald O. Perelman ("Perelman"), MAF's Chairman and controlling shareholder. Cinerama's personal liability action encompassed claims for fraud, breach of fiduciary duty and unfair dealing, and included a claim for rescissory damages, among other relief. Cinerama also claimed that the merger was void ab initio for lack of unanimous director approval of repeal of a supermajority provision of Technicolor's charter.

The defendants in the personal liability action moved to dismiss the action, arguing that Cinerama had no standing to pursue such a claim after petitioning for appraisal of its shares. The Chancellor denied the motion but ruled that after discovery was completed, Cinerama would have to elect which cause of action it wished to pursue. Cinerama filed an interlocutory appeal to this Court and we reversed. Cede & Co. v. Technicolor, Inc., Del.Supr., 542 A.2d 1182 (1988) ("Cede I "). In Cede I this Court found the Chancellor to have committed legal error in requiring plaintiff to make an election of remedies before trial. We held that the plaintiff shareholder was entitled to pursue concurrently, through trial, its appraisal action and its personal liability action. We then remanded the case for trial of the consolidated appraisal and personal liability actions.

Following an extended trial and after further discovery, the Chancellor elected to decide first the appraisal suit. The court did so notwithstanding this Court's implicit instruction in Cede I. 542 A.2d at 1189, 1191. ² By unreported decision (the "Appraisal Opinion") dated October 19, 1990, the Chancellor found the fair value of the dissenting shareholders' Technicolor stock to be $21.60 per share, as of January 24, 1983, the date of the merger. In June 1991, the court, in a second unreported decision (the "Personal Liability Opinion"), 1991 WL 111134, found pervasive and persuasive evidence of the defendant directors' breach of their fiduciary duties, but concluded that Cinerama had not met its burden of proof. On that ground, the Chancellor entered judgment for the defendants. The court also found no merit in Cinerama's further claims: that the merger was void ab initio; that Technicolor's directors had breached their duty of disclosure in their 14D-9 filing and proxy statement; and that MAF and Perelman, on becoming controlling shareholders of Technicolor, breached fiduciary duties owed Cinerama entitling Cinerama to rescissory damages. Cinerama then appealed both decisions.

* * *

Addressing the Personal Liability Opinion, we find no merit in Cinerama's direct claims for rescissory damages. We also find no error in the Chancellor's use of a materiality standard to define duty of loyalty. We find error in his reliance on a reasonable person analysis, but decline to resolve the loyalty issue on the present record. Neither the parties nor the trial court has addressed the relevance and legal effect of Technicolor's charter requirement of director unanimity (for sale of the company to be accomplished by less than ninety-five percent share vote on the merger) upon the trial court's presumed finding of the "material" disloyalty of directors Fred Sullivan and Arthur Ryan. The court has also not addressed the relevance and effect of the interested-director provisions of 8 Del.C. § 144 upon: (1) the business judgment rule's requirement of director loyalty; (2) Technicolor's charter requirement; and (3) Cinerama's claim for rescissory damages, assuming it prevails under an entire fairness standard of review of the merger.

We also conclude that the trial court has erred as a matter of law in reformulating the business judgment rule's elements for finding director breach of duty of care in the context of an arms-length, third-party transaction lacking evidence of director bad faith or director self-dealing. The Chancellor has erroneously imposed on Cinerama, for purposes of rebutting the rule, a burden of proof of board lack of due care which is unprecedented. We refer to the Chancellor's holding that a shareholder plaintiff such as Cinerama must prove injury resulting from a found board breach of duty of care, to rebut the business judgment presumption. The court has also erred in ruling that the damages recoverable by a wrongfully cashed-out shareholder such as Cinerama for board breach of fiduciary duty are limited to the difference between the fair value of its Technicolor stock, as determined for statutory appraisal purposes as of the date of the merger, and the cash tender offered. Apart from the unresolved duty of loyalty issues, on the trial court's presumed findings of board breach of duty of care, we find the business judgment presumption accorded the Technicolor board action of October 29, 1982 to have been rebutted for board lack of due care. Therefore, we reverse and remand the personal liability action with instructions to the trial court to apply the entire fairness standard of review to the merger.

Our determination of the personal liability action renders moot Cinerama's appeal of the Appraisal Opinion and the issues raised therein. See Cede I.

II. FACTS ³

A. Background

In 1970 Technicolor was a corporation with a long and prominent history in the film/audio-visual industries. Technicolor'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. In its field, Technicolor was the most prominent of a handful of companies. Notwithstanding Technicolor's dominance within its field, the company, by the late seventies, decreased in competitiveness. Its major film processing laboratory was, in the words of Morton Kamerman ("Kamerman"), its Chief Executive Officer and Board Chairman, ⁴ "totally out of control" and it was taking losses that were "unacceptable."

In response, Technicolor's Chief Executive Officer initiated efforts to reduce costs at Technicolor's film laboratories and to eliminate other inefficiencies. Through Kamerman's initiative, in the late seventies Technicolor's market share and earnings improved. However, by the early eighties, Technicolor's increase in market share had leveled off and the company's core business earnings had stagnated. Kamerman concluded that Technicolor's principal business, theatrical film processing, did not offer sufficient long-term growth for Technicolor, even...