The Delaware Chancery Court has found the recapitalization of a media production company entirely fair. Faced with the possibility of bankruptcy and unable to service its debt, the company's board of directors (acting through its special committee) approved a revised recapitalization plan proposed by the company's majority stockholder and primary debt holder. The special committee retained independent legal counsel and a financial advisor. The special committee, after engaging in extensive due diligence, determined to negotiate the recapitalization proposal. These negotiations resulted in a revised recapitalization proposal. As part of its review process, the special committee retained a second financial advisor to advise whether the revised recapitalization proposal was fair to the company from a financial point of view.
The court reviewed the recapitalization under the entire fairness standard. Under this standard, both the fairness of the (i) dealings between the majority stockholder and the special committee and (ii) price paid to the minority stockholders are analyzed.
The court shifted the burden of proof to the claimants after determining that the special committee was truly independent, fully informed and possessed of the freedom to negotiate at arm's length.
S. Muoio & Co. LLC v. Hallmark Entertainment Inv. Co., C.A. No 4729-CC (Del. Ch. March 9, 2011)