Corporate Governance

In re Loral Communications and the Possible Antipathy Towards Activist Shareholders (Part 1)

By J. Robert Brown

Perhaps we have an excessively jaundiced eye when it comes to Delaware decisions. In In re Loral Space and Communications, VC Strine produced a 91 page opinion essentially allowing shareholders to recover where the board allegedly entered into a sweetheart financing deal with the company's largest shareholder, MHR Fund Management.  But more closely read, the case very possibly demonstrates a hostility towards activist shareholders.

We are supported in the conclusion by the public pronouncements of the author of the opinion.  As VC Strine has more or less espoused in a law review article, activist investors are motivated by self interest and short term returns. They "can use the threat of a withhold campaign to bargain for concessions and the seating of some of their favorites by action of the incumbent slate." It is, as VC Strine believes, something that "smacks of green mail and a hidden form of cumulative voting, the benefits of which arguably flow largely to short-term activist investors."  The antagonism towards these types of shareholders has arguably shown instelf in at least one prior case.

In re Loral Space and Communications is consistent with this antipathy.  In that case, MHR owned 35.9% of Loral.  VC Strine described MHR as having a business model that "involved taking control of distressed companies and position itself to reap the benefits of control for itself and its investors."  Lest one have any doubt that the Vice Chancellor viewed the firm as a short term activist shareholder, he noted that MHR was the “eponymous creation of Mark H. Rachesky” and that Rachesky was "Carl Icahn's chief investment adviser."

These descriptions spell trouble for MHR, something that becomes clear from the decision.  In particular, the decision finds that a majority of the nine person board was beholden to MHR.  In doing so, however, it applied a standard for independence that, to say the least, conflicted with prior approaches by the Chancery Court.

We will examine the problems with the opinion in the next posts.  The opinion and a number of pleadings are filed on the DU Corporate Governace web site.

Full post as published by The Race to the Bottom on October 30, 2008 (boomark / email).