a. What is the duty of loyalty?
b. How was the duty of loyalty violated given that a Special Committee was formed to evaluate the merger?
Grupo Mexico was the controlling stockholder of Southern Peru Copper Corporation (SPC), an NYSE-listed mining company. Grupo also owned 99 percent of the stock of Minera Mexico, a Mexican mining company that was not publicly traded. Grupo offered to trade all its Minera stock for $3.1 billion of SPC shares. Because of Grupo's self-interest, SPC's board formed a special committee of disinterested SPC directors to evaluate the proposal. (The board knew that, in the event of litigation, the court would examine the underlying fairness of the transaction, but it hoped that approval by the special committee would influence the court's decision.)
The committee's financial advisor, Goldman Sachs, used many scenarios to run the numbers, but could not find any way to value Minera's stock at more than $2.8 billion. Rather than tell Grupo to go mine itself, the special committee stretched to develop some plausible story about why Minera was indeed worth the price Grupo was asking. So, for example, it tried "optimizing" Minera's cash flows, but not SPC's, ignoring the fact that Minera was struggling, while SPC was thriving and nearly debt-free.
In the end, SPC's committee approved Grupo's offer and then stuck with it, even as SPC's stock price climbed. In the end, SPC paid $3.75 billion for Minera.
SPC's minority shareholders filed suit against its board of directors, alleging that the Minera purchase was entirely unfair. The court, however, dismissed the case against the members of the special committee because SPC's charter had an exculpatory clause that protected directors who had not received any improper personal benefit. The suit continued against the directors who were employed by Grupo.