Tri-Star Pictures, Inc., Litigation, In re

• Decision Date: 22 September 1992
• Docket Number: TRI-STAR
• Citation: 634 A.2d 319
• Parties: In rePICTURES, INC., LITIGATION. . Submitted:
• Court: Supreme Court of Delaware

Page 319

634 A.2d 319

In re TRI-STAR PICTURES, INC., LITIGATION.

Supreme Court of Delaware.

Submitted: Sept. 22, 1992.

Decided: Nov. 24, 1993.

As Corrected Dec. 8, 1993.

On appeal from the Court of Chancery. REVERSED in Part, AFFIRMED in Part and REMANDED.

William Prickett (argued), Michael Hanrahan and Ronald A. Brown, Jr., Prickett, Jones, Elliott, Kristol & Schnee, Wilmington; Arthur T. Susman, Susman, Saunders & Buehler, Chicago, IL, and Roger W. Kirby, Kaufman, Malchman, Kaufman & Kirby, New York City, of counsel, for appellant.

James F. Burnett and Donald J. Wolfe, Jr., Potter, Anderson & Corroon, Wilmington; Allen Kezsbom and Debra M. Torres (argued), Fried, Frank, Harris, Shriver & Jacobson, New York City, of counsel, for appellees Sony Pictures Entertainment Inc., formerly Tri-Star Pictures, Inc., Victor A. Kaufman, David A. Matalon, Patrick M. Williamson, Judd A. Weinberg and Dan W. Lufkin.

Lawrence A. Hamermesh (argued), and Jon E. Abramczyk, Morris, Nichols, Arsht & Tunnell, Wilmington, for appellees Coca-Cola Co., CPI Film Holdings, Inc., Ira C. Herbert and Francis T. Vincent, Jr.

Allen M. Terrell, Jr., Richards, Layton & Finger, Wilmington; Robert C. Myers and Anthony J. Viola, Dewey Ballantine, New York City, of counsel, for appellees Home Box Office, Inc., Michael J. Fuchs, E. Thayer Bigelow, Jr. and Joseph J. Collins.

Before MOORE and HOLLAND, JJ., and RIDGELY, President Judge (sitting by designation).

MOORE, Justice.

In this class action the plaintiffs are former minority stockholders of Tri-Star Pictures, Inc. ("Tri-Star" or the "Company") who challenge a business combination between Tri-Star and the Entertainment Business Sector of the Coca-Cola Company (the "Combination"). The Combination, with its related transactions and surrounding facts, is complicated and convoluted--sufficient to daunt any but the most determined analyst or challenger. Shorn of its bristles and fuzz, however, it was the way Coca-Cola, at no significant cost to itself, obtained 80% ownership of Tri-Star. The Court of Chancery dismissed most of plaintiffs' claims as moot because a subsequent merger between Sony USA, Inc. ("Sony") and Tri-Star extinguished plaintiffs' standing to maintain a derivative suit. The defendants were granted summary judgment on plaintiffs' remaining claims because of a failure to adduce sufficient evidence of individual damage arising from the defendants' alleged nondisclosures. Our disposition of these issues is basically determined by this Court's recent decision in Cede & Co. & Cinerama, Inc. v. Technicolor, Inc., Del.Supr., 634 A.2d 345 (1993) (Horsey, J.), and our earlier decision of Weinberger v. UOP, Del.Supr., 457 A.2d 701 (1983). ¹ We find that the plaintiffs alleged sufficient individual injury resulting from the defendants' asserted manipulation of the Combination so as to dilute the cash value and impinge upon the voting rights of the minority's shares. Plaintiffs' claims clearly survive a motion to dismiss under Chancery Court Rule 12(b)(6). Such conduct, taken as true for present purposes, is a breach of the duty of loyalty requiring that the defendants' actions be judged by principles of entire fairness. Since this shifts the burden to the defendants to prove the "most scrupulous inherent fairness of the bargain", Weinberger, 457 A.2d at 710, there is no requirement that plaintiffs prove damages to survive a motion to dismiss. Accordingly, the trial court's dismissal of Counts I, II, V and VII of plaintiffs' Amended Complaint are reversed. The dismissal of Count III of plaintiffs' Amended Complaint on grounds of mootness is affirmed.

I.

A.

In this class action, plaintiffs are the holders of Tri-Star stock who either were eligible to vote or to direct the voting of Tri-Star shares at the December 15, 1987 meeting where the Combination was approved (the "Class"). This group excludes the defendants and their affiliates as of December 15, 1987. At that time the Class held approximately 43.4% of the 34.5 million outstanding common shares of Tri-Star.

The Company was formed in 1985 to succeed to the business of a joint venture organized earlier by CBS, Inc. ("CBS"), CPI Film Holdings, Inc., a subsidiary of Coca-Cola ("CPI"), and an affiliate of Home Box Office, Inc. ("HBO"), a subsidiary of Time Incorporated. Tri-Star was principally engaged in the production, distribution, and exploitation of feature-length motion pictures and television programs. ²

Defendant Coca-Cola was Tri-Star's largest single stockholder in 1985, owning 12,708,333 shares, representing 36.8% of its common stock. Coca-Cola became involved in the entertainment business upon acquiring Columbia Pictures Industries, Inc., and incorporated it into what became Coca-Cola's Entertainment Business Sector ("Entertainment Sector"). Coca-Cola later expanded its Entertainment Sector through other acquisitions.

Defendant HBO, a wholly owned subsidiary of Time Incorporated ("Time"), is engaged in programming and marketing pay-television services. HBO owned 3,125,000 shares (9%) of Tri-Star's common stock. ³ HBO has had significant business relationships with Tri-Star and Coca-Cola.

Tri-Star had two other major stockholders: Technicolor, Inc. ("Technicolor"), which owned 7.2%, and Rank American, Inc. ("Rank"), which owned 3.6%. The combined holdings of these four shareholders represented 56.6% of the Company's common stock.

The individual defendants are Victor A. Kaufman, Michael J. Fuchs, David A. Matalon, E. Thayer Bigelow, Jr., Joseph J. Collins, Patrick M. Williamson, Judd A. Weinberg, Ira C. Herbert, Dan W. Lufkin and Francis T. Vincent, Jr., all members of Tri-Star's board of directors at the time of the Combination. Of this group, Messrs. Herbert, Vincent, and Williamson were senior executives of Coca-Cola or a Coca-Cola affiliate and substantial owners of Coca-Cola stock. Three other members of the group, Messrs. Weinberg, Lufkin, and Matalon, also owned substantial shares of Coca-Cola stock that under the terms of the Combination entitled them to a significant personal financial benefit upon approval of the transaction. Both Messrs. Lufkin and Williamson were nominated to their positions on the Tri-Star board by Coca-Cola. Finally, Messrs. Bigelow and Collins are senior officers of Time and its subsidiary, HBO, which had significant commercial agreements with both Coca-Cola and Tri-Star before the Combination.

B.

Three basic transactions are significant to the issues before us. They are certain voting agreements, the Combination itself, and a transfer agreement.

The Voting Agreements

CPI, a wholly owned subsidiary of Coca-Cola, and HBO entered into the first of two such agreements with Tri-Star. One agreement provided that: (1) Coca-Cola and HBO would each designate four nominees to Tri-Star's ten member board, (2) CPI (on behalf of Coca-Cola) and HBO would vote their combined 45.8% share interest in favor of each other's nominees to the board of directors, and (3) they would not solicit proxies in opposition to any recommendation of the Tri-Star board. Under a second agreement, Technicolor and Rank were obligated to vote their combined 10.8% of the Company's common stock in favor of any proposal submitted to the stockholders on the recommendation of a majority of Tri-Star's board of directors. The net effect of these two agreements was that Coca-Cola and HBO retained effective control of Tri-Star with 56.6% of the common stock under their command.

The Combination

Plaintiffs aver that as early as May, 1987, Coca-Cola had been contemplating a combination of its Entertainment Sector and Tri-Star to rid Coca-Cola's balance sheet of the Entertainment Sector's undesirable assets. The Combination originated at a meeting in August 1987, at which Coca-Cola's president proposed to Tri-Star's chief executive officer, Victor Kaufman, that the two companies explore a transaction to combine Tri-Star and the Entertainment Sector. Within weeks, Coca-Cola had developed a detailed plan for the Combination of Tri-Star and the Entertainment Sector, out of which a new film entertainment company would emerge. Management representatives of Coca-Cola and Tri-Star then met to discuss the Combination and eventually negotiated a written proposal labeled the "Transfer Agreement." On August 31, 1987, Coca-Cola submitted the Transfer Agreement to the Tri-Star board of directors for its approval.

The Transfer Agreement

The Transfer Agreement provided that Tri-Star would acquire the Coca-Cola subsidiaries comprising the Entertainment Sector at their unappraised book value of $745 million in exchange for just over 75 million shares of newly issued Tri-Star common stock that, when added to the Tri-Star shares Coca-Cola already owned, would increase the latter's equity interest in Tri-Star from 36% to 80%. ⁴ Thereafter, Coca-Cola intended to declare a special dividend to its stockholders, of 31,400,000 of the approximately 75,000,000 Tri-Star shares it was to receive in the Combination. This would reduce Coca-Cola's common stock holdings in Tri-Star to 49%.

The number of shares to be received by Coca-Cola under the terms of the Transfer Agreement was based on a net book value ratio of the Entertainment Sector assets ($745 million) to those of Tri-Star ($265 million). The net book values used to set the ratio were determined by Coca-Cola's chief financial officer on July 31, 1987, and were clearly designed to ensure Coca-Cola's 80% ownership of Tri-Star. Under the Transfer Agreement, Coca-Cola retained certain assets of the Entertainment Sector, including $300 million in cash, a $240 million inter-company receivable, certain real estate, stock and assets. Coca-Cola also reserved the right to purchase $100 million of newly created Tri-Star preferred stock having liquidation and dividend preferences over the common stock.

Defendants' proxy materials seem to suggest that Coca-Cola acquired Tri-Star by transferring to it...