## Facts

- Emerging Communications, Inc. (ECM) was a publicly traded telecommunications company.
- Jeffrey Prosser, ECM’s chairman and CEO, controlled about 52% of ECM’s stock through Innovative Communication Company, LLC (ICC), an entity he owned and controlled.
- Prosser sought to take ECM private through a two-step transaction led by ICC:
  - A tender offer to buy minority shares, followed by
  - A second-step cash-out merger at the same price for remaining minority holders.
- In July 1998, Prosser provided ECM data to a prospective lender. The lender’s analysis indicated ECM stock value of roughly $28 per share.
- The lender’s estimate used management projections prepared in June 1998 that were materially more favorable than earlier projections (including March 1998 projections).
- The lender agreed to finance a bid up to approximately $11.40 per share.
- Prosser proposed to ECM’s board that ICC commence a tender offer at $9.125 per share, followed by a cash-out merger at the same price.
- ECM’s board formed a special committee to evaluate the controller proposal.
- Prosser did not provide the June 1998 projections to the special committee; the committee and its work proceeded using the weaker March 1998 projections.
- The special committee rejected the $9.125 proposal and negotiated the price up to $10.25 per share.
- Prosser represented that he could not pay more because of financing constraints, even though the financing discussions suggested he could pay more than $10.25.
- The committee retained a financial advisor, which delivered a fairness opinion that $10.25 per share was fair to the minority.
- The special committee recommended the transaction, and the full board approved it. Like the committee, the board generally did not have the June projection information, though at least one director had the background to appreciate that $10.25 was at the low end of a fair range.
- Some directors had other business relationships with Prosser and relied on him in other roles; directors also received substantial compensation for board service.
- After the tender offer increased Prosser’s holdings, the second-step merger was submitted for approval and completed at $10.25 per share.
- Dissenting stockholders sued ECM, ICC, Prosser, and ECM’s directors, seeking statutory appraisal and class damages for breach of fiduciary duty.
- ECM’s charter contained a DGCL § 102(b)(7) provision exculpating directors from monetary liability for duty-of-care breaches.

## Issues

1. What was the fair value of ECM stock as of the merger date for purposes of statutory appraisal under 8 Del. C. § 262?
2. Did Prosser, as controlling stockholder on both sides of the going-private transaction, breach fiduciary duties by causing a cash-out at $10.25 per share?
3. Did ECM’s directors breach fiduciary duties in approving the freeze-out process and price, given the committee process, the fairness opinion, and the absence of the June 1998 projections?
4. Does ECM’s § 102(b)(7) charter provision bar monetary liability for directors, and if not, which director(s) may be liable for damages?

## Decision

- The court appraised ECM shares at $38.05 per share as of the merger date.
- The court held the transaction subject to entire fairness review because Prosser controlled both ECM and the acquiring entity and dictated the terms of the freeze-out.
- The court found the process and price unfair, emphasizing the significance of the withheld June 1998 projections and the resulting distortion of valuation and negotiation.
- The court held Prosser liable for breach of fiduciary duty in connection with a controller-led freeze-out at an unfair price.
- The court imposed monetary liability on one outside director (Raynor), concluding that his knowledge, financial sophistication, and involvement supported a finding of non-exculpated wrongdoing rather than mere carelessness.
- The court found the remaining outside directors’ conduct amounted, at most, to duty-of-care violations and held them exculpated from monetary damages under § 102(b)(7).
- The court awarded appraisal relief at $38.05 per share and awarded class damages against Prosser and Raynor measured by the per-share shortfall between fair value and the merger consideration.

## Legal Principles

- A controller-led squeeze-out in which the controller stands on both sides is reviewed for entire fairness, requiring fair dealing and fair price.
- A special committee and a fairness opinion are considered within entire fairness; they do not by themselves cleanse a controller conflict, especially where the committee is not fully informed.
- Withholding material valuation information (such as current internal projections) from the special committee and its advisor can support a finding that the controller acted disloyally and that the process was unfair.
- In appraisal, the court may give little weight to market or deal price when the transaction is conflicted or the sale process and information flow are unreliable, and may rely heavily on discounted cash flow and other valuation tools.
- DGCL § 102(b)(7) bars monetary liability for duty-of-care breaches but does not protect directors from damages for loyalty breaches, bad faith, or intentional misconduct; director liability is assessed individually based on each director’s conduct and knowledge.

## Conclusion

In *In re Emerging Communications*, the Delaware Court of Chancery concluded that Prosser’s controller-led two-step freeze-out was not entirely fair because the process was compromised by the failure to provide the special committee and its advisor with the June 1998 projections that supported a substantially higher valuation. The court appraised ECM at $38.05 per share, held Prosser liable for the unfair cash-out, held one outside director (Raynor) liable based on his role and knowledge, and ruled that the remaining directors were protected from monetary damages by ECM’s § 102(b)(7) exculpatory provision.


In re Emerging Communications, Inc. Shareholders Litigation, 2004 WL 1305745 (2004)