Financial Articulation of a Fiduciary Duty to Bondholders with ...

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CREIGHTON LAW REVIEW [Vol. 20 basis for an individual claim for side payment without a corresponding derivative claim by some securityholder, 220 the individual claim overrides the derivative claim. 22 1 For example, there cannot be a derivative claim regarding a nonsynergistic merger per se because the corporation's assets (market value) are not damaged, but there can be an individual claim for side payment regarding an unanticipated wealth expropriation in such a merger. 222 What do such individual claims mean for corporate governance? The answer to this question is to be found in the logical extension of Weinberger's views. B. PROCEDURAL FAIRNESS 1. Additional Factual Aspects of Weinberger Four dual parent-subsidiary directors - in differing internal combinations - requested, performed, and discussed a feasibility study on the parent's acquiring the subsidiary's remaining publicly held shares. 223 This feasibility study used the subsidiary's "information for the exclusive benefit of" the parent 224 and concluded "that it would be a good investment for [the parent] to acquire the remaining 49.5% of [the subsidiary's] shares at any price up to $24 each." 225 The subsidiary's president, a dual parent-subsidiary director who participated in the parent's executive committee meeting which 220. Also, a securityholder might recast a derivative claim into an individual claim for side payment if there is a procedural advantage (e.g., application of an entire-fairness careful-scrutiny rule instead of a business judgment rule) in doing so. 221. See generally Bratton, Jr., The Economics and Jurisprudence of Convertible Bonds, 1984 WIs. L. REV. 667, 733-39; Clark, The Duties of the Corporate Debtor to its Creditors, 90 HARV. L. REV. 505 (1977); Coffee, Jr. & Schwartz, The Survival of the Derivative Suit: An Evaluation and a Proposal for Legislative Reform, 81 COLUM. L. REV. 261, 262 (1981); Levmore, Monitors and Freeriders in Commercial and Corporate Settings, 92 YALE L.J. 49, 80-82 (1982); Note, Creditors' Derivative Suits on Behalf of Solvent Corporations, 88 YALE L.J. 1299 (1979); Note, Public Creditors of Financial Institutions: The Case for a Derivative Right of Action, 86 YALE L.J. 1422, 1446-47 (1977). The argument that the economic case for bondholder derivative suits is compelling because their misconduct-deterrence effect leads to a reduction in the cost of debt capital, McDaniel, supra note 71, at 452 & nn.214-16, seems to be irrelevant from the viewpoint of the corporation's bondholders because the corporation's securityholders are indifferent about its financing decisions within the rule of corporate current-market-value maximization. See supra note 17 and accompanying text. In general, the separability of corporate financing and operating decisions occurs when there is no optimal capital structure for the corporation, see Miller, Debt and Taxes, 32 J. FIN. 261, - (1977), or when an optimal capital structure is not changed by the corporation, see DeAngelo & Masulis, Optimal Capital Structure Under Corporate and Personal Taxation, 8 J. FIN. ECON. 3 (1980). 222. See supra note 48 and accompanying text. 223. Weinberger, 457 A.2d at 705. There were seven parent designee directors (six dual parent-subsidiary directors) on the subsidiary's thirteen member board of directors. Id. at 704-05. 224. Id. at 709. 225. Id. at 705.
1986] FIDUCIARY DUTY TO BONDHOLDERS responsively authorized its management to arrange for a subsidiary cash-out merger within the price range of $20 to $21 per share and to present a merger proposal to the parent's board of directors four business days later, 226 retained an investment banking firm to pro- 2 27 vide a fairness opinion on the prospective cash-out merger offer. He did not at any time seek a cash-out share price higher than $21 per subsidiary share; 228 there was no parent-subsidiary bargaining 2 29 over the cash-out share price. The parent and subsidiary boards of directors met - separately, but with telephone contact maintained between the meetings - to consider the cash-out merger proposal. 230 The parent formally proposed to the subsidiary a $21 per share cash-out merger agreement requiring that the minimum number of the subsidiary's majority of the minority shares voting for the merger equal about two-thirds of all the subsidiary's minority shares. 231 The subsidiary's investment banking opinion letter, which was hurriedly prepared during the four business day span, found the $21 share price to be fair. 232 Although the parent's feasibility study with its $24 subsidiary share price valuation "was made available to" dual parent-subsidiary directors, 233 it was not discussed at the subsidiary's board meeting 234 nor shared with the subsidiary's nonparent designee directors. 235 The subsidiary's board of directors, with the active nonvoting participation and support of its parent designee directors, adopted a resolution to accept the parent's $21 per share cash-out merger offer. 236 The cash-out merger agreement was approved by a majority vote of the subsidiary's minority shares at the subsidiary's annual meeting fifty-nine business days later. 237 The subsidiary's proxy statement regarding this cash-out merger agreement vote did not disclose: (1) "the circumstances surrounding the rather cursory preparation of the [investment banking] fairness opinion" while "the impression was given [the subsidiary's] minority that a careful study had been made, '23 8 and (2) "the critical information that [the parent] 226. Id. at 705-06. 227. Id. at 706. 228. Id. at 706, 711. 229. Id. at 711. 230. Id. at 707. 231. Id. 232. Id. 233. Id at 709. 234. Id. at 707. 235. Id. at 708. 236. Id. at 707. 237. Id. at 708 (stating the percentage as "51.9% of the total minority"). 238. Id. at 712.
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