TABLE OF CONTENTS I. FACTUAL & PROCEDURAL HISTORY ............................................................. 1181 A. Intermedia investigates strategic alternatives ........................................ 1181 B. Digex appoints a Special Committee .................................................... 1183 C. WorldCom enters the fray .............................................................. 1184 D. The deal changes ...................................................................... 1184 E. The Special Committee's morning caucuses .............................................. 1185 F. The Intermedia board meeting .......................................................... 1186 G. The Digex board meeting ............................................................... 1186 H. Procedural History .................................................................... 1187 II. STANDARD FOR A PRELIMINARY INJUNCTION .................................................... 1187 III. THE CORPORATE OPPORTUNITY CLAIM .......................................................... 1188 A. Summary of the Arguments .............................................................. 1188 B. Legal Analysis ........................................................................ 1189 1. Why Digex had no "interest or expectancy" in a WorldCom-Digex deal ............................................................................. 1189 2. Did defendants breach their duty of loyalty in negotiating the WorldCom-Intermedia deal? ............................................................................ 1192 3. Are the defendants estopped from completing a WorldCom-Intermedia deal? ............................................................................ 1194 4. Is this a Revlon case? ............................................................. 1195 IV. SECTION 203 CLAIM ........................................................................ 1197 A. Does the 85% exemption apply to WorldCom? ............................................. 1198 B. Is this Claim Ripe for Adjudication? .................................................. 1205 C. Was the § 203 Waiver Entirely Fair to the Digex Shareholders? .................... 1206 1. Fair Dealing ....................................................................... 1207 2. Fair Price ......................................................................... 1211 V. THREAT OF IRREPARABLE HARM AND BALANCING OF THE POTENTIAL HARM ......................................................................... 1214 VI. CONCLUSION ............................................................................... 1216
This is my decision on plaintiffs' motion to preliminarily enjoin the proposed merger between defendants WorldCom, Inc. ("WorldCom") and Intermedia Communications, Inc. ("Intermedia"), the controlling shareholder of Digex, Inc. ("Digex").
The allegations in plaintiffs' consolidated complaint are founded on two distinct legal theories. Plaintiffs' first theory is that defendants usurped a corporate opportunity that (allegedly) fairly belonged to Digex by preventing Digex's sale to the highest bidder. Plaintiffs' second theory is that the Digex board, more specifically the four interested Digex directors, breached a fiduciary duty when they voted to waive the protections afforded Digex by § 203 of the Delaware General Corporate Law ("DGCL").
At the outset it is important to recognize the highly unusual circumstances surrounding the pending request for injunctive relief. The plaintiffs have asked, in the context of a preliminary injunction, for relief that is both prospective and retrospective. Specifically, the plaintiffs seek either a preliminary injunction against the future consummation of a merger (via a claim of usurpation of corporate opportunity) or, alternatively, a preliminary decision that declares invalid or ineffective a past act of the Digex board to waive the protections afforded under 8 Del.C. § 203.
For the reasons discussed more fully below, the plaintiffs have not persuaded me that they have a likelihood of success on the merits of their corporate opportunity claim. On the other hand, they have shown a likelihood of success on the merits of their § 203 claim. In the course of analyzing the merits of the § 203 claim, however, it becomes abundantly clear that no injunctive order is necessary to protect plaintiffs from a future act or decision that threatens immediate irreparable harm. That is because the § 203 claim is based on a past decision or action from which the harm has already occurred. Any injury based on the § 203 claim has resulted not from pending action, but from action past — by the faithless acts of the four Intermedia directors who voted to waive § 203's protections. There is no prospective harm that could be avoided by the application of a preliminary injunction. Thus, any relief must be remedial, rather than injunctive. The Court's determination that plaintiffs have a likelihood of success on their § 203 claim means that the parties to the merger — Intermedia and WorldCom — must decide whether to proceed with that transaction knowing that this Court has preliminarily determined that Digex's § 203 waiver will not likely be effective in the circumstances of this case. For this reason as well, no basis exists for injunctive relief based on the § 203 claim, because the plaintiffs' ultimate success on the merits of that claim will have the practical effect of restoring to the Digex minority shareholders the protection to which they were entitled under § 203.
Notwithstanding the unusual posture in which the request for injunctive relief is presented to the Court, I will address the application in the typical fashion of a motion for a preliminary injunction. In Part I of this Opinion I set forth the factual and procedural history relevant to the resolution of plaintiffs' motion. Part II describes the applicable standard for preliminary injunctive relief. In Part III, I address plaintiffs' corporate opportunity
I. FACTUAL AND PROCEDURAL HISTORY
A. Intermedia investigates strategic alternatives
Intermedia and Digex are both Delaware corporations. Intermedia is an integrated communications provider delivering local, long distance, and enhanced data services, principally to business and governments. Digex provides managed web hosting and application hosting services primarily to large corporate clients. Intermedia has held a controlling interest in Digex since July 1997. Following public offerings in August 1999 and February 2000, Intermedia now owns 52% of Digex's outstanding stock which represents approximately 94% of the voting power of all of Digex's outstanding stock.
During the time periods relevant to this case, Digex's board of directors had eight members, five of which — David C. Ruberg, Robert M. Manning, Philip A. Campbell, John C. Baker, and George F. Knapp — were also officers or directors of Intermedia.
Digex is well positioned in one of the hottest segments of the technology sector — web hosting. Intermedia, however, is in poor financial condition.
In July, Bear Stearns approached WorldCom about potential strategic alternatives concerning Intermedia and Digex. A deal involving Intermedia presented an opportunity for WorldCom on two fronts. First, Intermedia has a presence in the Competitive Local Exchange Carrier (CLEC) market and WorldCom could acquire these CLEC assets. Second, through Digex, WorldCom could expand its presence in the critical web-hosting arena.
WorldCom was not the only potential suitor for Intermedia approached by Bear Stearns. During July and August, Bear Stearns contacted thirty likely suitors for Intermedia or Digex, received expressions of interest from thirteen, sent confidentiality agreements to ten, and received executed non-disclosure agreements from, and sent materials to, six.
Though Global Crossing was involved up until the end,
B. Digex appoints a Special Committee
The directors of Intermedia and Digex understood from the beginning of this process undertaken by Bear Stearns that conflicts of interest might arise between the two companies. Put simply, Digex was a rapidly growing company that was extremely attractive to potential suitors. As stated above, Intermedia had severe financial problems. In fact, as of August, Intermedia's equity holdings in Digex exceeded Intermedia's total market capitalization. Intermedia and its banker, Bear Stearns, had three possible avenues before it. Intermedia could sell itself, could sell its holdings in Digex, or could sell part or all of both companies.
If Intermedia sold itself (which, of course, would include its majority stake in Digex), Intermedia's shareholders stood in a position to reap a substantial premium on their shares, largely due to the acquirer's presumable desire to obtain control over Intermedia's "crown jewel," Digex. This was especially true with regard to Intermedia's officers and directors, who, as discussed above, stood to profit tremendously from a sale of Intermedia. In contrast, Digex's shareholders stood to gain comparatively little under this possibility, at least in the short term, other than a new controlling shareholder.
If Intermedia sold part or all of its Digex holdings, Intermedia could expect a significant payoff to fund its own operations, but Intermedia's shareholders, and especially its officers and directors, would not personally benefit to the extent they would if Intermedia itself were sold. Under this possibility, Digex shareholders could expect to reap a significant premium if Intermedia sold its holdings to an acquirer who decided to then tender for all outstanding Digex shares.
These various options and possibilities clearly presented the potential for conflicts of interest for the interested Digex directors, both due to their dual directorships and their direct, personal financial interests in any potential transaction. Thus, on July 26, 2000, the Digex board of directors appointed a special committee (the "Special Committee") comprised of two of the three independent Digex directors — Jalkut and Reich. Their role was "to participate in the transaction process and make recommendations to the full board of directors on matters where there could be a perceived conflict of interest between Intermedia and Digex."
The true extent of the Special Committee's authority was evident as early as August, before WorldCom came on the scene. The Special Committee was involved primarily with the Exodus transaction during July and August. On August 21 the Special Committee arrived at the Digex board meeting prepared to vote on an Exodus transaction, but learned when it arrived that such a transaction would not be presented for a vote.
C. WorldCom enters the fray
Although WorldCom had conducted internal evaluations regarding a possible transaction with either Intermedia or Digex as early as July, these evaluations did not result in any action until August 30. On that day, WorldCom began to seriously consider a bid for control of Digex. Almost exactly forty-eight hours would elapse between WorldCom's first contact, a call from its banker to Bear Stearns late on August 30, and the Intermedia board's approval of the WorldCom-Intermedia merger late in the afternoon on September 1.
Those forty-eight hours began on August 30 between 6:00 and 7:00 p.m. when Scott Miller of Salomon Smith Barney & Co. ("Salomon"), WorldCom's bankers, called Andrew Decker of Bear Stearns with an expression of interest to acquire Digex at $120 a share or more. Miller told Decker that WorldCom would outbid anyone for Digex. After speaking with Intermedia's negotiators, Decker informed Miller that WorldCom would have to move quickly. WorldCom did just that. Through various phone calls that evening, WorldCom decided to send a due diligence team to New York the following day in order to negotiate a transaction. Sutcliffe sent a draft merger agreement, which was only for a direct acquisition of Digex, to WorldCom's counsel, Cravath, Swaine & Moore ("Cravath").
Global Crossing still had an outstanding offer at this point and was working toward a September 1 signing. On the morning of August 31, Sutcliffe and Decker told Global Crossing that there was another suitor for Digex — WorldCom. Global Crossing decided not to bid against WorldCom but continued working toward its September 1 target.
The WorldCom due diligence team arrived at Sutcliffe's office in New York on August 31, sometime shortly after noon. There, they met with various senior executives from Digex and discussed numerous operational issues regarding Digex. At one point, William Grothe, Vice President of Corporate Development for WorldCom, Sutcliffe, Ruberg, Decker, and another Bear Stearns representative met separately to discuss Intermedia's concern that the transaction was not moving quickly enough. These men testified that both before and during this private meeting, the only deal that was being discussed was WorldCom's direct acquisition of Digex.
D. The deal changes
After this private meeting, Bernard Ebbers, WorldCom's President, and Grothe had several phone conversations. Grothe testified that at about 5:00 p.m. on August 31, Ebbers told him that WorldCom was going to purchase all of Intermedia rather than Digex.
During the night and morning of August 31-September 1, Intermedia and WorldCom negotiated the merger and WorldCom conducted abbreviated due diligence of Intermedia. Sutcliffe suggested that WorldCom should make a tender offer for the Digex public shares, but WorldCom refused.
E. The Special Committee's morning caucuses
Up until this point, the Special Committee had not been intimately involved with the proposed WorldCom-Digex transaction. Until the late evening of August 31, the Special Committee had been led to believe WorldCom was buying Digex. Now, the Committee members knew the deal had changed and, once again, it had changed without their consultation. This had happened just the morning before at the August 31 Digex board meeting, when the Special Committee members were informed, much to their surprise, that the Global Crossing-Digex transaction had been changed to a WorldCom-Digex transaction.
Thus, on the morning of September 1, the Special Committee, Jalkut and Reich, met with their lawyer, Clark, and Shull and Adams, for a breakfast meeting around 7:00 a.m. to discuss their options. Specifically, they asked Clark for his legal opinion regarding the validity of the switch to the WorldCom-Intermedia merger that was currently being negotiated from the
Shull, Jalkut, and Reich devised a strategy of proposing a mini-auction at the Digex board meeting later that day because they all believed the proposed WorldCom-Intermedia transaction was the worst of the three possible deals for Digex.
Next, the Special Committee met with Ruberg who reported the sequence of events culminating in WorldCom's offer for Intermedia. According to Jalkut, Ruberg assured the Special Committee that the deal was in the best interests of both Intermedia and Digex.
Finally, the Special Committee met with its financial advisors, CSFB, in order to prepare for the Digex board meeting later that day. During the time when the Special Committee was meeting with their financial advisors at CSFB's New York offices, Ebbers of WorldCom had a 45-minute telephone conversation with Jalkut and Reich, as Clark had requested.
F. The Intermedia board meeting
The Intermedia board also met on the morning of September 1 to discuss the proposed WorldCom transaction. Following their discussion of the need for a § 203 waiver by Digex, the Intermedia board meeting was adjourned and Reich, Jalkut, and Shull, as well as the Special Committee's advisors, were invited into the room for a meeting of the full Digex board. The interested directors of Digex, who had been in the room for the Intermedia meeting, remained, as did Bear Stearns, for the Digex meeting.
G. The Digex board meeting
Sutcliffe informed the Digex board that Intermedia had considered the WorldCom and Global Crossing proposals and determined that the WorldCom proposal was better for Intermedia. CSFB presented its findings to the entire board. CSFB concluded that the WorldCom deal was the
As had been planned at the breakfast meeting, Jalkut proposed a mini-auction of Digex, i.e., that a decision on the WorldCom transaction be deferred for approximately three days to allow CSFB to solicit best and final offers from WorldCom, Exodus, and Global Crossing, as well as to determine whether any other potential bidders existed. After some discussion, the proposal was defeated by a vote of four to three. The three disinterested directors voted in favor of the auction and the four interested directors voted against any step that would delay the WorldCom transaction.
The Digex board then turned its attention to the § 203 waiver. The debate, however, was brief and truncated, with discussion limited to the issue of who should vote on the waiver. Clark argued that due to the clear conflicts of interest faced by the interested directors, they should abstain from the vote. Sutcliffe asserted that he saw no reason to prevent the interested directors from participating. Sutcliffe would later testify that, "I discussed with [the interested directors] or reminded them that in voting on anything as a Digex director, they had to disregard entirely their relationship with Intermedia and had a fiduciary obligation to act only in the best interest of Digex and all of its shareholders."
H. Procedural History
Following the public announcement on September 5, 2000, of the proposed merger between Intermedia and WorldCom, Digex stockholders filed a series of class and derivative stockholder suits. Ultimately, all of the actions were consolidated into this single action and WorldCom was joined as a party defendant. On October 2, 2000, this Court granted plaintiffs' motion for expedited proceedings. Thereafter, the parties engaged in expedited discovery, including the production of documents, numerous depositions, and the filing of legal memoranda. Plaintiffs' motion for a preliminary injunction was argued before the Court on November 29. At the Court's request, the parties filed supplemental memoranda regarding the § 203 issue on December 4.
II. STANDARD FOR A PRELIMINARY INJUNCTION
This matter is presently before the Court on plaintiffs' motion for a preliminary injunction. When seeking a
As I noted earlier, the plaintiffs assert two different legal theories in this action. First, they argue that the defendants have breached their fiduciary duties and usurped a corporate opportunity that belonged to Digex and its shareholders. Second, the plaintiffs contend that the defendants breached the fiduciary duties they owed to Digex and its shareholders by voting to waive the protections afforded by § 203. I turn first to the corporate opportunity theory.
III. THE CORPORATE OPPORTUNITY CLAIM
Delaware Courts employ the following test to determine whether a corporate opportunity has been usurped by a fiduciary. The corporate opportunity will be found to have been usurped:
It is with this test in mind that I will evaluate the plaintiffs' claim that the defendants have usurped a corporate opportunity belonging to Digex.
A. Summary of the Arguments
The plaintiffs argue that they satisfy all elements of the test for the usurpation of a corporate opportunity and, thus, there is a likelihood that they will succeed on the merits at trial. The opportunity that plaintiffs insist they had was an "expectancy" in selling their Digex shares to a buyer for approximately $120.00 per share.
That expectancy, the plaintiffs urge, was created by Intermedia's alleged promise that any deal Intermedia brokered would include a sale of the Digex minority shareholders' shares. As the argument goes, the defendants breached their fiduciary duties when the Intermedia-affiliated Digex directors allegedly steered WorldCom away from a Digex deal and towards an Intermedia deal.
The defendants respond to these contentions with three primary arguments. First, they argue that there was no corporate opportunity to usurp because "Intermedia owns an absolute majority of Digex's voting rights and equity. Intermedia is entitled to sell or refuse to sell its Digex stock solely in its own interest; it is entitled to vote its shares in its own interest; and, neither the Digex board nor its shareholders can sell Digex without Intermedia's consent."
B. Legal Analysis
For the reasons discussed below, I conclude that Digex, as a corporation, had no legally cognizable "interest or expectancy" in a WorldCom-Digex deal. Thus, the plaintiffs will not be able to prove an element of the corporate opportunity doctrine and are unlikely to succeed on the merits. Moreover, while the behavior of certain actors in this corporate drama does not paint a picture of model director behavior, I cannot conclude, on the limited factual record before me, that the defendants' conduct was undertaken in bad faith. Because I am deeply skeptical that the plaintiffs will be able to produce evidence at trial to prove their currently unsupported suspicions, I am not persuaded that plaintiffs have a reasonable probability of success on the merits of their corporate opportunity claim.
1. Why Digex had no "interest or expectancy" in a WorldCom-Digex deal.
A claim that a director or officer improperly usurped a corporate opportunity belonging to the corporation is a derivative claim.
With this distinction in mind, the claim that the defendants usurped a corporate opportunity must necessarily constitute an "injury" to the corporation and thus be a derivative claim.
Here, the plaintiffs contend that the defendants, by allegedly steering WorldCom away from a Digex deal and towards an Intermedia deal, appropriated an opportunity that belonged to the plaintiffs. That opportunity was the ability to sell Digex to the highest bidder.
The opportunity the plaintiffs identify, however, is not an "interest or expectancy" of Digex the corporation qua corporation. Rather, the purported opportunity is that of the Digex shareholders to sell their Digex shares to the highest bidder. Thus, the perceived corporate opportunity is not really a corporate opportunity at all, but more closely resembles an individual opportunity of the shareholders. Because the opportunity the plaintiff's identify was not one in which Digex as a corporation had an "interest or expectancy," plaintiffs do not have a reasonable likelihood of success on such a claim.
The present case also is strikingly similar to Thorpe v. CERBCO, Inc.,
George and Robert Erikson were directors, officers, and controlling shareholders of CERBCO, Inc. While the Eriksons owned 24% of CERBCO's total equity, they exercised effective voting control with 56% of the total votes. They were also two of the four directors on CERBCO's Board.
CERBCO, as a holding company, owned voting control of a subsidiary, Insituform East, Inc. ("East"). A third party approached the Eriksons in their capacity as directors and officers
The Supreme Court, in addressing the issue of the corporate opportunity, found that:
The Court went on to find that the "§ 271 rights, not the breach [of the duty of loyalty], were the proximate cause of the nonconsummation of the transaction. Accordingly, transactional damages are inappropriate."
I understand the Supreme Court's holding in CERBCO to require a finding that, while majority shareholders may breach their duty of loyalty on similar facts, the powers inherent in the majority status generally preclude a plaintiff from claiming that a corporate opportunity has been usurped where the majority shareholder could have blocked the transaction in any event. This is so because no "interest or expectation" fairly belonged to the corporation since the majority could block the transaction at any time.
The same reasoning leads to the same result in this case. Just as the Eriksons could block CERBCO's efforts to sell the subsidiary East, so Intermedia may block any undesirable transactions involving its subsidiary Digex.
In some respects this case is clearer than CERBCO because here the complaining parties, Digex and its shareholders, are totally removed from the transaction between WorldCom and Intermedia. No Digex shares will change hands and, presumably, Digex's preexisting relationship with Intermedia will be the same. Intermedia would merely have a new owner.
Because the defendants could block proposed transactions involving the sale of Digex, it seems unlikely that Digex and its shareholders could have a legally cognizable interest or expectancy in a WorldCom-Digex deal. In the absence of such a protectable interest, plaintiffs have no reasonable
2. Did defendants breach their duty of loyalty in negotiating the WorldCom-Intermedia deal?
In the context of the corporate opportunity claim, plaintiffs appear to rely upon two distinct theories as to how the defendants breached their fiduciary duties. First, they contend defendants breached the duty of loyalty by usurping a corporate opportunity, a claim which (as already mentioned) stands little chance of success. Second, they argue that the recent decision in McMullin v. Beran
As to this second theory, Thorpe v. CERBCO again is instructive. There the Supreme Court separated the consideration of whether the defendants usurped a corporate opportunity and whether they breached their duty of loyalty. Since I have already addressed the corporate opportunity aspect of the argument, I now turn to the duty of loyalty aspect.
The CERBCO Court found the Eriksons had breached their duty of loyalty to CERBCO. How the CERBCO Court reached that conclusion will guide this Court in determining whether the defendants have breached a duty of loyalty owed to the plaintiffs.
In CERBCO, the third party approached the Eriksons, in their capacity as officers and directors, about the potential purchase of the subsidiary, East. The Eriksons, however, immediately steered the third-party towards purchasing their controlling block of CERBCO in order to gain control of East.
The Eriksons never informed the other CERBCO board members of this interest in the subsidiary East, but did inform them of the proposed sale of the Eriksons' stock. In fact, a member of the CERBCO board later specifically asked the Eriksons whether there had been any interest in a purchase of East. "The Eriksons denied that [the third-party] had ever made such an offer, and had [they] done so, the Eriksons indicated that they would likely vote their shares to reject it."
Ultimately, it was this lack of candor that led both the Chancellor and the Supreme Court to find that the Eriksons had breached their duty of loyalty.
In applying this analytical framework, the Court decided that since the Eriksons were approached in their capacities as directors of CERBCO, their loyalties should have been to the company. To satisfy their duty to act in good faith, the Eriksons
The Court recognized that "[t]he Eriksons were entitled to profit from their control premium and, to that end, compete with CERBCO but only after informing CERBCO of the opportunity. Thereafter, they should have removed themselves from the negotiations and allowed the disinterested directors to act on behalf of CERBCO."
Thus, if one compares the Eriksons' behavior to that of the defendants here, I must consider whether the defendants adequately disclosed any potential interest or proposal to Digex and provided Digex a reasonable opportunity to act. If the defendants did not act in that manner, it may well suggest that they breached a duty of loyalty to Digex's minority shareholders.
To answer this question, one must focus on the events that occurred between August 30, 2000, and September 1, 2000.
On August 30, WorldCom representatives contacted the bankers that were assisting Intermedia in exploring its options, two of which were either selling itself or selling its "crown jewel," Digex. WorldCom was told that a purchase of Digex would require an offer of upwards of $120.00 per share. WorldCom was not deterred and began due diligence. WorldCom was aware that it was working to beat a September 1, 2000 deadline. Digex representatives were immediately notified of this new interest. Thus, at this point, Digex, through its representatives, was aware of WorldCom's initial interest in the company.
Sometime on August 31, however, WorldCom decided that a purchase of Intermedia was more desirable than a purchase of Digex because of the significant cost savings. WorldCom made a preliminary inquiry into what price Intermedia would seek, and was told that it could purchase Intermedia for $39.00 per share. As WorldCom found this initial term agreeable, it decided to shift its due diligence
These facts are not in serious dispute. Viewed in light of CERBCO's analysis, they lead me to conclude, although provisionally, that the defendants did not breach their duties of loyalty to the plaintiffs at this juncture in the negotiation process. Digex had notice of WorldCom's interest from the beginning, although it had been assured by Intermedia's representatives that any negotiated sale of Intermedia's majority interest in Digex would seek to include an offer for the minority public shareholders. Moreover, Digex apparently was notified of WorldCom's change of heart within a short time of the switch. At this point, I do not find persuasive the plaintiffs' contention that the deal was a fait accompli merely because there had been a preliminary agreement as to price. Although I recognize that an effort by Digex to revive a WorldCom-Digex deal may have been futile considering Intermedia's stance, the defendants only had to give fair notice of the opportunity to Digex. In these circumstances, I do not think it likely that plaintiffs can show the Intermedia defendants, as a controlling stockholder, had a duty to see that a particular transaction involving Digex was consummated.
Nor does the defendants' behavior approach the egregiousness of the Eriksons. Unlike CERBCO, Digex knew of WorldCom's initial interest from the beginning. Moreover, defendants made no attempt to conceal the fact that the deal had changed. As this Court found in another case with analogous facts:
Based on my review of the mostly undisputed evidence at this juncture, I conclude that plaintiffs have not demonstrated a reasonable likelihood of success on the merits of their breach of the duty of loyalty claims.
3. Are the defendants estopped from completing a WorldCom-Intermedia deal?
An additional matter I must address is an argument that the plaintiffs raise in their reply brief — that the defendants should be estopped from agreeing to a sale of Intermedia.
This argument takes its genesis from Intermedia's early expressions that it needed to complete some kind of deal to rectify adverse financial conditions. To that end, Intermedia issued a press release in July, 2000, stating that it had "retained Bear Sterns to explore strategic alternatives
The plaintiffs' arguments on this issue, and the supporting evidence they rely upon, demonstrates their fundamental misunderstanding of Intermedia's intentions. This misunderstanding, perhaps, explains in part the catalyst for this litigation. The record evidence, however, does not fairly support such a broad reading of Intermedia's intentions. Intermedia clearly expressed its intention that if it sold its majority stake in Digex, it would seek a comparable deal for the minority shareholders. This is the sum and substance of the evidence on this point at this preliminary stage of the proceeding, and it cannot be understood (at least not yet) as promising anything more or anything less. One certainly cannot read the evidence as legally obligating Intermedia to secure a transaction for the Digex minority shareholders when Intermedia sells itself. Moreover, based on the limited available evidence at this juncture, one could not reasonably conclude that Intermedia made a blanket promise that any deal it considered would necessarily involve a deal for the Digex minority. Given the state of the record, plaintiffs' estoppel theory does not appear reasonably likely to succeed on the merits.
4. Is this a Revlon case?
Although presented awkwardly and belatedly, I will address plaintiffs' argument that "[t]he individual defendants breached their fiduciary duties under Revlon."
First, plaintiffs' so-called Revlon claim is not properly before the Court. Several plaintiffs asserted Revlon claims in their original complaints, but all of these claims were voluntarily dropped when the consolidated class and derivative complaint was filed. Thus, no properly alleged Revlon claim exists for this Court to consider.
Second, even if such a claim were properly alleged, it would have little likelihood of success. Revlon and its progeny address the policy concern that minority shareholders are particularly vulnerable when a proposed transaction will result in a change of control in their corporation.
In this case, however, no "change of control" is proposed regarding Digex. The Digex minority existed before the proposed merger and it will not change under the proposed transaction. What will change is the ownership of Digex's majority shareholder, Intermedia.
Finally, it is important to recognize that any effort to sell Digex in a Revlon-style auction would appear to be futile.
To summarize, it does not appear that the plaintiffs' direct and related claims — that the defendants usurped a corporate opportunity allegedly belonging to Digex — have a reasonable probability of success on the merits. First, Digex had no "interest or expectancy" in a WorldCom-Digex transaction that fairly belonged to it. Second, the evidence suggests that Digex was informed of WorldCom's initial interest in evaluating a purchase of Digex. It does not appear that that matter was concealed from Digex by the defendants. In addition, Digex, through its representatives, was notified that WorldCom's interest had switched to purchasing Intermedia. Third, it does not appear that the evidence would support a conclusion that the defendants made an enforceable "promise" that in any event the Digex minority shareholders' interests would be purchased. Nor does the record indicate that the Intermedia defendants made unequivocal statements that all of Digex would be sold.
Accordingly, I am not persuaded that plaintiffs have demonstrated a reasonable likelihood of success on the merits of the various claims they have made under the rubric of the corporate opportunity theory.
IV. SECTION 203 CLAIM
In their second claim, the plaintiffs argue that the interested Digex directors breached their fiduciary duties by causing Digex to improperly waive § 203 of the DGCL. Specifically, the plaintiffs assert that because the waiver was accomplished by the vote of the four Intermedia-affiliated Digex directors, and against the vote and advice of the three independent Digex directors, the vote must be judged under the entire fairness standard. Plaintiffs contend that the defendants have failed to meet this standard.
I first turn to the operative statute. The applicable provisions of § 203 read as follows:
As is clear on its face, once an entity becomes an "interested stockholder," § 203, subject to certain exemptions, prohibits business combinations between a Delaware corporation and that shareholder for a period of three years.
The defendants make three arguments that the § 203 waiver did not constitute a breach of fiduciary duty and therefore will not support preliminary injunctive relief. First, defendants contend that § 203 will not prohibit a future business combination between Digex and WorldCom because even if the waiver was invalid, WorldCom still is exempt from § 203 because it will possess over 85% of the Digex voting power. Second, the defendants assert that the plaintiffs are asking for an advisory opinion because no business combination has yet been presented to Digex and, therefore, this dispute is not ripe for adjudication. Third, the defendants argue that the § 203 waiver was, in any case, entirely fair to the Digex shareholders.
A. Does the 85% exemption apply to WorldCom?
The facts are undisputed by either party that upon the completion of the merger, WorldCom will possess well over 85% of the voting power of Digex but well under 85% of the number of outstanding voting shares of Digex.
The primary support for the defendants' reading of the term "voting stock" is found in § 212(a) of the DGCL. Section 212(a) states in relevant part:
Based on § 212(a), the defendants assert that ownership of "voting stock" under § 203 must be measured by the voting rights of that stock rather than the number of shares of that stock entitled to vote, where, as here, the certificate of incorporation provides for a class of stock with super-voting rights.
Under this definition, for purposes of determining whether a shareholder has acquired the 85% figure of § 203(a)(2), the Legislature effectively excluded any need for an interested shareholder to acquire outstanding non-voting shares or shares of stock that have a limited right to vote for the election of directors.
The language of § 203(a)(2) itself can be interpreted to attest to the equity interest, not the voting power, interpretation of "voting shares." The statute explicitly states that as part of the 85% of voting stock calculation, one must determine "the number of shares outstanding" excluding certain specified shares.
Generally, where a statute is unambiguous, there is no reasonable doubt as to the meaning of the words used and the Court's role is then limited to an application of the literal meaning of the words.
The legislative history of § 203(a)(2), although ultimately unclear, strongly suggests that those contemplating the adoption of the statute believed they were talking about an economic equity percentage, not a voting power percentage. Section 203 received an unprecedented amount of scrutiny before its adoption.
There are several sources to consider in attempting to appraise the true legislative intent and purpose behind § 203.
Among the comments and submissions considered by the Legislature before the adoption of § 203, two members of the Council of the Corporation Law Section of the Delaware Bar Association submitted a report to the Delaware General Assembly concerning the proposed § 203. The report lists six principal advantages of the statute. Among these advantages, the authors noted that:
This language strongly suggests that the members of the Corporation Law Section of the Delaware State Bar Association interpreted "85% of the voting stock" to refer to the number of shares, not votes, owned by an interested shareholder. This language also emphasizes the crucial role directors must play in protecting the interests of shareholders during a possible change of control.
The intense debate over § 203 in part centered on § 203(a)(2). Specifically, the 85% shareholder exemption was one of the most disputed provisions in the entire statute and received a tremendous amount of scrutiny. Among the most vociferous opponents of the 85% shareholder exemption (originally set at 90%) was then-SEC Commissioner Joseph Grundfest. In a series of letters and testimony before the Delaware Legislature, Commissioner Grundfest objected to the 85% exemption because of the unreasonably onerous burden he believed this requirement would place on tender offers.
Goldman and McNally's report to the Delaware General Assembly directly took on the issue of the proper percentage exemption:
The comments and interpretations of those involved in the public debate of § 203(a)(2)'s 85% exemption imply that these individuals believed that the 85% figure referred to the percentage of equity that agreed to tender, not of the voting
As this debate over the 85% threshold exception evidences, § 203(a)(2) was crafted with the procedures of tender offers in mind. The primary policy motivation behind this statute was to deter potential acquirers from using two-tiered highly leveraged tender offers.
To demonstrate this point, let us assume that a certain hypothetical shareholder acquires 40% of the equity of a firm through a tender offer aimed specifically at certain super-voting shares of that company. Through these super-voting shares, this equity stake translates into voting power of 90%. Thereby, that shareholder has in no way made an offer that is attractive to a majority of the firm's outstanding equity, but defendants would have this Court believe that this shareholder has satisfied the exemption. This is exactly the type of behavior the statute is meant to apply to and prevent.
Now, push this hypothetical closer to the facts at hand. Let us instead assume that a hostile takeover bid is able to entice 52% of the outstanding shares of a company to accept an initial tender offer. Further, assume that that 52% equity stake represents 94% of the voting power of the
Defendants counter this policy argument with one of their own. Essentially, the defendants argue that this could not possibly be the proper policy intention behind the 85% exemption because, following that same logic, an "interested shareholder" would only reach the 15% threshold if that shareholder owns 15% of the outstanding economic equity of a corporation and not merely 15% of the outstanding voting power of the corporation. The defendants assert that this would have major implications for shareholders everywhere and it is not at all what the Legislature intended. Using the example of a hypothetical shareholder who owns 10% of the equity of a corporation yet controls 51% of its voting power, the defendants argue that, to be consistent, that shareholder could not be considered an interested shareholder subject to § 203 even though she could enter into transactions and determine corporate policy. The defendants posit that interpreting "voting shares" in terms of equity, and not voting, would therefore render the statute powerless towards this hypothetical shareholder. But I think the defendants choose to ignore the implications of their hypothetical to the present case — where this difference between the equity interest and the voting interest of WorldCom in Digex similarly presents the potential for abuse. Defendants assert that their hypothetical shareholder would circumvent, and effectively "gut," the statute. In a very practical sense, the position taken by the defendants in this case may have already accomplished that task.
For present purposes though, let us continue to assume that the legislative record and policy motivations on the issue of the 85% exemption actually provide no definitive answers in instances involving supervoting stock. The Court notes, however, that although the legislative record arguably may not speak directly to the subtleties of the "voting stock" issue, the possibilities presented by super-voting stock were clearly within the purview of the debate surrounding the drafting and adoption of § 203. Before the adoption of § 203, a number of Delaware corporations had begun to experiment with defensive techniques based on "scaled voting" in which voting power decreases in proportion to increased equity ownership
Moreover, super-voting rights are certainly not a new invention under Delaware law and were well known and understood by those drafting and commenting on § 203 before its adoption. The DGCL has long recognized that, with respect to corporations authorized to issue stock, voting rights of that stock may be varied by the certificate of incorporation as between classes and as between series within a class. Thus, the right to vote certain shares may be denied entirely, may be limited to certain matters, more or less
Irrespective of the final answer to the question of what is the proper interpretation of "85% of the voting shares" in § 203(a)(2), there is no dispute that this is a close question of Delaware law where strong arguments have been put forward by both sides. In particular, the strength of the § 212(a) related definition seems to be belied by the policy rationales and the legislative intent behind the statute. Moreover, the language of the statute itself simply offers no definitive answers.
Further, as will be discussed in more depth in Part IV, B, immediately below, the Court has not been convinced that this defense is legally ripe. Rather, a decision on WorldCom's qualification for the 85% shareholder exemption would be purely advisory at this point in time.
Given the difficulty and complexity of this legal issue, there is no question that the § 203 waiver had redundant value to WorldCom. WorldCom, as well as Intermedia and Digex, were all advised by able legal counsel regarding the applicability of § 203 and these attorneys disagreed on the proper interpretation. Perhaps more importantly, based on this disagreement, as well as the recognition of each lawyer in this matter who advised any of the parties on the applicability of § 203, there was no way to definitively know at the time of the waiver vote whether WorldCom actually would qualify for the 85% exception. This alone is enough for this Court to conclude that the waiver had value and granted some degree of bargaining leverage to Digex. The directors of the Digex board, regardless of the ultimate applicability of § 203 to WorldCom after the completion of this merger, had a fiduciary obligation that fully applied to them during the vote to grant WorldCom a waiver of the prohibitions contained in § 203.
B. Is This Claim Ripe for Adjudication?
The defendants next argue that until WorldCom actually proposes a "business combination" within three years after the closing of the merger, there will be no threatened injury and no claim to analyze. This argument mischaracterizes the plaintiff's claim. In reference to the discussion immediately above, the defendants make a strong case that, in fact, their initial defense regarding the applicability of § 203 is not ripe for analysis at this point in time. That is, even if the Court could come to a conclusion regarding WorldCom's qualification for the 85% exemption, a decision on that argument presented by the defendants would be purely advisory. The plaintiffs do not challenge any conduct by WorldCom that is governed by § 203 though. Rather, the plaintiffs have asserted a fiduciary duty claim, not a statutory
In determining whether a given claim is indeed ripe,
Here, the plaintiffs' claim concerns the vote to waive the protections offered by § 203, a vote that has already occurred. All the facts relevant to this vote occurred in the past and left the full factual record in its wake.
Regardless of how § 203 will apply to WorldCom in the future, there is no dispute that the waiver was a negotiated term, referenced in the merger agreement itself, and had value to all parties concerned in the transaction. A resolution of this matter is of the utmost importance to all of the parties as the merger moves toward receiving the approval of Intermedia's shareholders and the closing presumably soon thereafter. The Court also notes that corporate fiduciaries must be given clear notice of what conduct is and is not allowed.
C. Was the § 203 Waiver Entirely Fair to the Digex Shareholders?
On its face, § 203 does not bar interested directors from participating in a vote to approve a transaction in which an entity becomes an interested stockholder.
Where a director holds dual directorships in the parent-subsidiary context, there is no dilution of this obligation to demonstrate the entire fairness of specific board actions.
As often summarized in our caselaw, the concept of entire fairness has two basic components, fair dealing and fair price.
1. Fair Dealing
In attempting to satisfy their burden, the defendants point to several factors to illustrate that the process leading up to the § 203 waiver vote was characterized by fair dealing. The defendants contend that there was complete candor between the interested directors and the independent Digex directors. The defendants point out that the Special Committee, along with its own lawyers and bankers, had participated in the Exodus and Global Crossing negotiations, had been immediately briefed on all developments in the Intermedia-WorldCom negotiations, and had been given access to WorldCom prior to the Digex board meeting through phone calls with Ebbers and Grothe. The defendants additionally claim that every member of the Digex board, including the independent directors, "had all the information in Intermedia's possession regarding each proposed transaction."
As a starting point, the Court will briefly describe in chronological order the events in question from the perspective of the independent Digex directors. At midday August 30, Digex seemed headed into a three-way merger with Global Crossing and Intermedia. At 11:00 p.m. on August 30, Ruberg called each of the Special Committee members to inform them that WorldCom had offered $120 a share for Digex. At this point, Global Crossing was continuing to work towards a September 1 signing in its deal with Intermedia and Digex. In either case, Digex stood in an enviable position. Perhaps more importantly though, considering how things turned out, there was no reason to discuss the applicability of § 203 at this point in time with respect to either transaction.
On the morning of September 1, the independent directors at last were allowed direct contact with WorldCom, their prospective controlling shareholder who had requested the § 203 waiver. These phone calls occurred, however, not only after the price and structure of the WorldCom-Intermedia deal had been agreed upon, but also after the terms of the § 203 waiver had been settled between the interested directors and WorldCom during the preceding night. Further symbolizing the extent of the control that the interested directors maintained over all negotiations with WorldCom concerning the § 203 waiver issue, these phone calls respectively between Ebbers of WorldCom and Jalkut and Reich of Digex and then Grothe of WorldCom and Shull and Adams of Digex came only after Clark, Digex's legal counsel, requested them. Also on the morning of September 1, the independent directors received both the advice of legal counsel on the possible applicability of § 203 and the opinion of their financial advisors regarding the benefits of each prospective deal. In the very short time they had before being called into the Intermedia board meeting to hold the Digex board meeting, the independent directors considered their options.
At the Digex board meeting, the Special Committee's legal counsel informed the entire board of his opinion that the interested directors should not participate in the § 203 waiver vote. This advice was rebutted by counsel for the interested directors, and ultimately ignored. Later, without any debate whatsoever on the merits of the waiver or the applicability of the statute, the full Digex board voted to grant the waiver by a divided vote of four interested directors for and three independent directors against. In total, there simply was no meaningful participation by any of the independent Digex directors in the negotiations leading to the § 203 waiver, the terms of that waiver, or the vote itself.
Several other conclusions immediately emerge from the facts of this matter when meshed together with the defendants contentions and justifications. First, regardless of whether the Special Committee actually had all the information possessed by Intermedia in its negotiations with WorldCom over the § 203 issue, the four interested directors controlled the flow of all information from WorldCom to the independent Digex directors during the hectic negotiating period from the evening of August 30 to the morning of September 1.
Second, given that WorldCom first sought the waiver of § 203 during the negotiations that took place solely between WorldCom and Intermedia during the night of August 31-September 1 and that the vote at the Digex board meeting occurred at most roughly twelve hours later, all of the Digex directors learned about WorldCom's demand for the § 203 waiver only hours before the vote granting that waiver. To make matters worse, because the interested directors were also directors of Intermedia, they could not even devote the little time they had before the board vote to considering their options as Digex directors and negotiating solely in the interests
Third, in regards to the waiver of § 203, there is almost no evidence of any direct negotiations between any of the parties over this provision in the deal. From the little that seems to have occurred, these negotiations took place during the night of August 31-September 1 between the interested directors, Sutcliffe, and the WorldCom representatives. The waiver appears to have been agreed to, in part, in exchange for an amendment to the Digex certificate of incorporation that would require the approval of independent directors of any material transaction between WorldCom and Digex after the merger. The record is silent as to exploration by the interested parties of any other options available to Digex. That is, as it appears that WorldCom insisted on the waiver, did any of the interested directors attempt to withhold this request in order to see what WorldCom might offer to Digex in return? Or, did the directors request concessions in addition to the certificate amendment that might benefit Digex or Intermedia? Or, as the plaintiffs assert, did the interested directors simply agree to this condition in the interests of getting the deal between Intermedia and WorldCom done and only subsequently add the provision to the merger agreement concerning the certificate amendment to create the appearance of consideration for the § 203 waiver? These facts remain unclear. It is crystal clear though that the independent directors, at the time of the negotiation over the § 203 waiver, had absolutely no role whatsoever.
This lack of any involvement by the Special Committee is particularly remarkable because Intermedia continues to assert that the Special Committee was created by Digex, specifically by the interested directors, "to evaluate the fairness to the Digex public shareholders of any transaction which involved the sale of [Intermedia's] Digex stock and to participate in any such transaction."
The defendants also argue that the vote itself was the result of fair dealing. The interested directors recognized that the time frame within which the Digex directors needed to make a decision on the § 203 waiver was quite short. They claim that this deadline was dictated by the deadline placed by Global Crossing on its
The defendants actually state that, at the time of the § 203 waiver vote, each Digex director knew that:
Since Intermedia would not allow a sale to either Exodus or Global Crossing given the offer made by WorldCom, the 5:00 p.m. Global Crossing deadline should have been of little or no consequence in comparison to the decision to waive the anti-takeover protections afforded by § 203 and any efforts to use its leverage to explore whether WorldCom would consider a partial or full tender offer for the outstanding Digex shares. Clearly, Intermedia wanted to complete a deal with WorldCom as soon as possible. As the facts illustrate, Intermedia placed time pressure on WorldCom throughout the negotiations, not the other way around, due to the presence of Global Crossing's offer. I see no reason why such time pressure was placed on Digex to agree to the waiver.
By the time of the Digex meeting when the vote to waive § 203 was undertaken, the Digex board's role had been vastly simplified over the preceding two days. On August 30, the Digex board was confronted with the sale of the corporation and all the attendant analysis that goes along with that process. On September 1, however, the only issue of any consequence before the Digex board was the rather discrete issue of whether to waive the protections afforded by § 203. Independent director Jalkut proposed that a decision on the WorldCom transaction be delayed three days to allow CSFB time to solicit best and final offers from Exodus, Global Crossing, and WorldCom. That proposal was defeated by a vote of four to three. The Digex board then discussed the § 203 waiver, but the discussion was limited to who should be allowed to vote on the waiver, nothing more. Except for the disagreement of counsel on this participation issue, described above, there was absolutely no discussion whatsoever of the effect, purpose, or applicability of § 203 to WorldCom. The vote proceeded (four to three) and the waiver was granted.
The defendants suggest that the independent directors had decided before the meeting to vote against the waiver and therefore any discussion on the merits of the waiver would have been pointless. All I can say is I certainly hope that the interested directors thought through and decided their votes before the Digex board meeting. Based on the record of what was discussed at the meeting, or rather the complete lack thereof, if any of the directors based their vote on anything that
In sum, as to whether the waiver can be described as the result of fair dealing, the independent directors, even if we assume that they were kept fully up to date of all material information regarding the merger negotiations, were kept powerless to affect the waiver decision in any meaningful manner. The interested directors not only participated in the negotiations, they controlled them. They also denied an independent negotiating structure involving the independent directors from participating in the WorldCom negotiations over the § 203 waiver. The powerlessness of the independent directors extended to their ability to vote down the proposal to waive § 203's applicability to WorldCom. Further, there appears to have been little substantive discussion or negotiation of the waiver by the interested directors with WorldCom and no discussion of the waiver with the independent directors. All of these factors are framed by the intense time pressure placed on Digex by its corporate parent to get the WorldCom deal done as quickly as possible regardless of any consideration of the applicability or effect of the § 203 waiver on Digex after the merger, or the bargaining leverage that the Digex board might have at that moment against not only WorldCom, but Intermedia as well. I therefore conclude that it is not reasonably likely that defendants will be able to satisfy the fair dealing prong of the entire fairness analysis.
2. Fair Price
Defendants assert that the "price" of the waiver was fair. They point out that as a result of the WorldCom-Intermedia merger, Digex (i) would gain WorldCom's commitment to fully finance Digex's business plan and its contemplated capital expansion even before the closing; (ii) was freed of Intermedia's oppressive debt covenant restrictions; and (iii) would receive the benefit of WorldCom's strong financing capacity, sales force, data centers, and strong internet presence. Moreover, as noted above, WorldCom agreed to an amendment of Digex's certificate of incorporation whereby any future material transaction between WorldCom and Digex must be approved by independent Digex directors. The defendants further contend that at the time of the vote, each Digex director knew that there were certain constraints on Digex's ability to negotiate freely with any of its potential suitors, including WorldCom, because of Intermedia's desire to do a deal with WorldCom and WorldCom's refusal to negotiate any further over Digex.
Each interested director has offered individual reasons why each of them felt justified in his vote to waive the protections afforded by § 203. Campbell speaks at length in his deposition of his belief that the WorldCom-Intermedia merger would be good for the Digex minority shareholders.
In explaining why he voted in favor of the waiver, Ruberg stated, "if the board of Intermedia was going to accept the WorldCom deal, looking at that as a Digex board member, I wanted to grant the maximum business flexibility to the acquiring parent to make Digex as successful as possible."
Baker states that he was "very comfortable" with the WorldCom transaction "from the standpoint of a Digex director."
Finally, Manning states that he believed, as a Digex director, that the merger was good for Digex in the long run and in the short run.
Before I turn to the specifics of this fair price analysis, it is important to emphasize exactly what was being negotiated and voted upon before the Digex board. The discussion needs to focus on the substance
The trade put before the Digex board was simple: waive § 203 and give up the protections granted by the terms of the statute in exchange for a stronger corporate parent who had much to offer, the certificate amendment, and the end of the burdensome relationship with Intermedia. Was this the best deal available? Because of the manner in which the negotiating process was handled, it is impossible to say. Perhaps Digex could have extracted something more from WorldCom, perhaps not. It is clear, however, that Digex had little to lose and should have felt no immediate time pressure to make a decision that would continue to affect the public shareholders of Digex for up to the three years following the merger.
The plaintiffs do not dispute that WorldCom is a good fit in many respects, vastly superior to Intermedia in many ways, or that Digex strongly desired to be rid of Intermedia's restrictive presence. But given Intermedia's admittedly poor financial condition, the independent Digex directors believed that, inevitably, Intermedia would have to sell part or all of its stake in Digex if Intermedia was to remain solvent. Time, therefore, was strongly on the side of Digex. Further, the certificate amendment is of some value to the Digex minority, but clearly it is not worth the same as the § 203 waiver, or WorldCom would not have insisted on the waiver in the first place.
As to the specific justifications offered by the interested directors, there is thorough discussion throughout of the reasons why WorldCom was perceived as such a strong choice to become the new controlling shareholder of Digex. But there are few substantive reasons given for their decision to waive § 203 at the point in time that the vote occurred. Campbell testified that he believed WorldCom might pull the deal if Intermedia deferred its decision.
In concluding this analysis of entire fairness, it appears that the only entity that really stood to lose should the Digex board decide to further analyze § 203 and vote to at least delay the grant of the waiver by a day or two was Intermedia, not Digex. The behavior of the interested directors in controlling both the negotiations and vote over the § 203 waiver surely demonstrates, in a compelling fashion, that the waiver really did present Digex with bargaining leverage against Intermedia and WorldCom. This leverage simply was not used — could not be used — because of the decision of the interested directors. In the unique circumstances here, this conduct by directors acting with a clear conflict of interest is difficult to justify and would not seem appropriate. I conclude preliminarily that the defendants are not reasonably likely to meet their burden as to the entire fairness of the Digex board's decision to waive Digex's § 203 protections and, therefore, that plaintiffs have demonstrated a reasonable probability of success on the merits of their § 203 claim.
V. THREAT OF IRREPARABLE HARM AND BALANCING OF THE POTENTIAL HARM
The plaintiffs have established a likelihood of success on the merits of their claim that the defendants breached their fiduciary duties in waiving the protections afforded by § 203. Now I must consider whether the plaintiffs will suffer irreparable harm if no injunction is ordered as to that claim.
As noted at the outset of this Opinion, this case has presented the Court with an unusual request for injunctive relief on the § 203 waiver decision. The request for injunctive relief that would have followed had the plaintiffs convinced this Court of the likelihood of success on the corporate opportunity claim presents the more typical situation where preliminary injunctive relief may be appropriate. That is, the plaintiffs asked this Court to issue an injunction to prevent the closing of the Intermedia-WorldCom merger, an event that has not yet occurred, in order to prevent the clear monetary-based irreparable harm that otherwise would have befallen
In stark contrast, the § 203 waiver decision does not present that typical injunction situation. Here, the plaintiffs have essentially asked the Court, via an injunction, to invalidate the September 1, 2000, vote by the Digex board to waive the applicability of § 203. This unusual procedural posture — where a party seeks an injunction long after the action threatening harm has been taken — presents two problems. First, the relief the plaintiffs request is final; it is all the relief to which they would be entitled following a full trial on the merits. It is an extraordinarily rare event for a party to obtain the equivalent of final relief at a provisional stage of the proceedings.
The second problem is related to the first, and even more troubling. Unlike the plaintiffs' corporate opportunity claim, the offending act the plaintiffs would like for this Court to preliminarily enjoin under the § 203 claim has already occurred. That is, the Digex board has already voted to waive § 203. Given that fact, an injunction issued by this Court would involve a retrospective, not a prospective, form of relief. In other words, because the wrongful act has already occurred, no prospective injunctive order can possibly be an effective remedy. In that sense, the plaintiffs' request for a preliminary injunction against the Digex board's § 203 decision is both temporally impossible and jurisdictionally inappropriate.
Finally, not only would an injunction be improper here where the wrongful conduct has already occurred, but an injunction is, in my judgment, unnecessary to fully protect the Digex minority shareholders. As the above analysis demonstrates, there is, to put it mildly, extreme uncertainty over whether § 203 will apply to WorldCom if it acquires Intermedia according to the merger agreement. That extreme uncertainty is no different today than it was in late August when the WorldCom-Intermedia transaction was being negotiated. What is now much more certain, however, is that the § 203 waiver decision most likely did not have the "belt and suspenders" effect that it was intended to have. In this sense, the uncertainty that WorldCom-Intermedia attempted to contract around, via the § 203 waiver requirement, is an uncertainty that is clearly extant today, just as it was in late August, and provides the plaintiffs with all the relief to which they are entitled. Of course, given the analysis of the defendants' conduct in securing the
For all of the reasons assigned in this Opinion, I deny injunctive relief as to the corporate opportunity claim because the plaintiffs fail to demonstrate a likelihood of success on the merits of that claim. Although the plaintiffs do demonstrate a likelihood of success on the merits of their § 203 claim, they have not shown a threat of imminent irreparable harm. Thus, they are not entitled to injunctive relief on this claim.
If this case goes to trial, the defendants have the burden of establishing the entire fairness of the § 203 waiver. This will be no small burden, based on the evidence I have reviewed in the last week. As I have noted in this Opinion, the current record strongly suggests that the § 203 waiver decision was not entirely fair to the Digex minority. In the wake of this Opinion, the defendants' choice becomes whether they will proceed with a WorldCom-Intermedia merger knowing that this Court seriously questions the integrity of the § 203 waiver decision and knowing that certain of the defendant fiduciaries stand accused of faithless acts that under the stringent standard of the entire fairness test, could well give rise to a range of equitable remedies, including monetary remedies.
An Order has been entered in accordance with this decision.
BNS Inc. v. Koppers Co., 683 F.Supp. 458, 469 (D.Del.1988) (preliminarily upholding the constitutionality of § 203).
Goldman & McNally, Exec. Summ. § 3 (quoted in 1 Balotti & Finkelstein, at § 6.16).