$1.3bn Grupo ruling is Strine v. Goldman, ex-Wachtell partner

By Alison Frankel
October 17, 2011

Grupo Mexico’s lead lawyer, Alan Stone of Milbank, Tweed, Hadley & McCloy, told me Monday that the company was “shocked” by Chancellor Leo Strine’s 106-page Oct. 14 ruling that the company owes $1.26 billion to the shareholders of Southern Peru Copper Company — the second-biggest shareholder derivative award in history.

It is a pretty shocking ruling. Strine found that Grupo Mexico, which at the time owned more than 50 percent of the shares of Southern Peru, basically forced the publicly-traded company to overpay, in stock, for Minera, Grupo’s privately-held Mexican mining company. In reaching that conclusion, the Chancellor managed to do three remarkable things: He rejected the judgment of Goldman Sachs, which advised Southern Peru on the deal; he questioned decisions by former Wachtell, Lipton, Rosen & Katz partner Harold Handelsman, who represented a minority owner of Southern Peru that was eager to cash out its stake; and he concluded that a special board committee of investment bankers conducted a tainted analysis. From the lead judge in a court that’s best known for making it almost impossible to prosecute a shareholder derivative suit successfully, this is a ruling every securities and corporate lawyer should read. (Plus, it’s written in Strine’s usual fluent, engaging style.)

Don’t cry too hard for Grupo Mexico (if you happen to be the sort of person who cries for corporate defendants found liable of breaching their duty to shareholders). Not only is it planning to appeal, according to Milbank’s Stone, but it now owns about 80 percent of the shares of Southern Peru, so even if it loses on appeal and has to pay up, it’s basically moving money from one pocket of Grupo Mexico’s fat wallet to another.

Nevertheless, for the sake of fairness, here’s Grupo’s comment: “The decision is not supported by the evidence presented at trial and is inconsistent with Delaware law,” Stone told me. “The court held the admittedly independent special committee … to an unrealistic and unachievable standard. Moreover, the court substituted its judgment not only for highly sophisticated board members but also for that of Goldman Sachs.”

So with all that gravitas weighing in support of the Southern Peru decision essentially to pay Grupo $3.1 billion in stock for Minera, how did plaintiffs’ lawyers at Prickett, Jones & Elliott and Kessler Topaz Meltzer & Check convince Chancellor Strine the deal was improper? (It wasn’t by working quickly. Strine quotes Vice-Chancellor Lamb, who handled the suit for several years after it was filed in 2004, criticizing the plaintiffs’ lawyers for failing to prosecute the case, then adds his own chastisement.)

But the plaintiffs’ lawyers ultimately came up with evidence that when Goldman Sachs evaluated Grupo’s offer to sell Southern Peru Minera, it concluded that under a strict valuation analysis, the Mexican company wasn’t worth anything approaching the value of the shares Grupo Mexico wanted for it.

As the judge wrote: “Goldman summed up the import of these various analyses in an ‘Illustrative Give/Get Analysis,’ which made patent the stark disparity between Grupo Mexico’s asking price and Goldman’s valuation of Minera: Southern Peru would ‘give’ stock with a market price of $3.1 billion to Grupo Mexico and would ‘get’ in return an asset worth no more than $1.7 billion.” (In testimony, Grupo Mexico said the price it wanted for Minera came from its bankers at UBS.)

Instead of telling Grupo Mexico “to go mine [itself],” as Strine put it, the special committee charged with weighing the deal had Goldman revise the analysis. Because Minera wasn’t publicly traded and couldn’t be valued by its share price, Goldman turned to what Strine called a “relative valuation.” Grupo Mexico contended that the revised comparison meant that Southern Peru and Minera were being judged on a similar basis.

Strine saw it differently.

“The special committee justified paying a higher price [for Minera] through a series of economic contortions,” he wrote. “According to special committee member [Harold] Handelsman, these ‘bells and whistles’ made it so that ‘the value of what was being … acquired in the merger went up, and the value of the specie that was being used in the merger went down,’ giving the Special Committee reason to accept a higher merger price.” (In the course of the special committee’s eight-month consideration of the deal, Grupo did agree to take fewer Southern Peru shares for Minera, but Southern Peru’s share price also rose dramatically because copper prices spiked.) It didn’t help Southern Peru and Grupo Mexico that the Goldman Sachs banker who led the deal evaluation, a non U.S.-resident, refused to come to Delaware to testify.

Strine also included a lot of discussion of the role of Handelsman, a former Wachtell M&A partner who is now general counsel for the Pritzker family’s interests. The Pritzker entity that owned an 11 percent stake in Southern Peru at the time Grupo Mexico was pushing for the Minera deal — a vehicle called Cerro — was simultaneously negotiating with Grupo Mexico to unload its Southern Peru shares. That, according to Strine, put Handelsman, who was a member of the Southern Peru board’s special committee, in a weird position.

“Although I am not prepared on this record to find that Handelsman consciously agreed to a suboptimal deal for Southern Peru simply to achieve liquidity for Cerro from Grupo Mexico, there is little doubt in my mind that Cerro’s own predicament as a stockholder dependent on Grupo Mexico’s whim … influenced how Handelsman approached the situation,” Strine wrote.

“Put simply, although I continue to be unpersuaded that one can label Handelsman as having acted with the state of mind required to expose him to liability given the exculpatory charter protection to which he is entitled, I am persuaded that Cerro’s desire to sell influenced how Handelsman approached his duties and compromised his effectiveness.” (I left a message with Handelsman but didn’t hear back.)

Handelsman withdrew from the special committee’s vote on the deal, which was ultimately approved by shareholders. Strine also dismissed claims against him and the other special committee members, leaving just Southern Peru officers and Grupo Mexico as defendants. And those defendants, he concluded, breached their fiduciary duty by causing Southern Peru to pay an unfair price for Minera. He calculated the difference between what Southern Peru paid and what it should have paid to be $1.23 billion.

A final note: Strine didn’t suggest attorneys’ fees for the plaintiffs’ lawyers, but it doesn’t sound like he’s going to approve a windfall payout for this extraordinary award. He said fees will be paid out of the award and suggested the two sides get together on a suggestion.

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