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RE: fiduciary duty, entire fairness and opportunity cost

From: Ken Scott <kenscott@stanford.edu>
Date: Mon, 15 Mar 2004 14:17:10 -0800
Message-Id: <LYRIS-24436-16994-2004.03.15-17.16.06--www-validator-css#w3.org@list.law.umaryland.edu>
To: "BIZLAW" <bizlaw@list.law.umaryland.edu>
I agree with Bill.  Operationally, if the self-dealing contract is "fair" 
(that is, within the contract range in an Edgeworth box), that should 
satisfy the legal standard.  Courts have a difficult enough job assessing 
fairness in a single transaction.  Institutionally, how could they possibly 
examine every other potential transaction in a firm's opportunity set to 
determine that none was more favorable?  Such a requirement would have the 
perverse result of rendering effective judicial review near-impossible.





At 09:39 AM 3/15/2004 -0500, you wrote:
>If you can't borrow, you can seek new equity financing to exploit the
>new opportunity.  My reaction is that courts won't look beyond a range
>of fairness, and market value is certainly in that range.  We don't
>expect courts using the business judgment rule to examine the IRR for
>competing projects.
>
>-----Original Message-----
>From: Daniel Posin [mailto:dposin@law.tulane.edu]
>Sent: Thursday, March 11, 2004 4:52 PM
>To: BIZLAW
>Subject: RE: fiduciary duty, entire fairness and opportunity cost
>
>I don't know about that.  You can't always borrow what you want (unless
>you're Enron at its height).
>
>         Daniel Q Posin
>         Judge René H. Himel Professor of Law
>         Tulane Law School
>         6329 Freret Street
>         New Orleans, LA 70118
>         504-865-5982 (O)
>         504-862-8846 (F)
>         dposin@law.tulane.edu
>
>
>
>-----Original Message-----
>From: Peter Letsou [mailto:pletsou@willamette.edu]
>Sent: Thursday, March 11, 2004 3:51 PM
>To: BIZLAW
>Subject: Re: fiduciary duty, entire fairness and opportunity cost
>
>
>It could certainly be the case that the firm is presented with two
>investment opportunities, one that has a positive net present value and
>another (the conflict of interest transaction) that has a zero net
>present value.  Taking the positive net present value opportunity would
>certainly seem to be the correct choice if the firm had to choose.  But
>why should the firm have to choose?  If the foregone (unconflicted)
>opportunity really has a positive net present value, then the firm
>should be able to find financing to take advantage of that opportunity
>as well.  If this is correct, then the availability of the second
>opportunity should have no bearing on the "entire fairness" of the
>first.
>
>Peter Letsou
>
>----- Original Message -----
>From: "Daniel Posin" <dposin@law.tulane.edu>
>To: "BIZLAW" <bizlaw@list.law.umaryland.edu>
>Sent: Thursday, March 11, 2004 1:10 PM
>Subject: RE: fiduciary duty, entire fairness and opportunity cost
>
>
>Yeah, I'm having trouble putting the idea that the transaction was the
>arm's length fair price together with the idea that there was a superior
>opportunity available for limited corporate funds.  Of course maybe the
>alternative was something of unusual value uniquely (and briefly)
>available to the company, for one reason or another.  I'd like to see
>Vice Chancellor Strine tee off on that one.
>
>Daniel Q Posin
>Judge René H. Himel Professor of Law
>Tulane Law School
>6329 Freret Street
>New Orleans, LA 70118
>504-865-5982 (O)
>504-862-8846 (F)
>dposin@law.tulane.edu
>
>
>
>-----Original Message-----
>From: Beveridge, Norwood [mailto:paladin@okcu.edu]
>Sent: Thursday, March 11, 2004 2:32 PM
>To: BIZLAW
>Subject: RE: fiduciary duty, entire fairness and opportunity cost
>
>
>I assume that the opportunity is one that the company can use.  Also,
>that it has funds available.  If the company has limited funds and other
>more attractive investment opportunities (from an ROI or other point of
>view), that should be considered in my opinion, although I don't recall
>seeing this discussed.  Seems to me this is comprehended in the concept
>of arms' length transaction.
>
>Norwood P. Beveridge
>
>-----Original Message-----
>From: John Matheson [mailto:mathe001@tc.umn.edu]
>Sent: Thursday, March 11, 2004 2:23 PM
>To: BIZLAW
>Subject: Re: fiduciary duty, entire fairness and opportunity cost
>
>
>Dan--Courts (that is, judges) generally aren't that sophisiticated.
>Indeed, I truly believe that only academics would even ask the question.
>If the decision is within the range of reasonableness, in the sense that
>the deal could be justified on an arm-length basis, a Delaware court
>would not second guess it---and I would hope that a Minnesota court
>would not either.  Good to hear from you.  John
>
>On 11 Mar 2004, at 14:04, Kleinberger, Daniel wrote:
>
> > I'm looking for guidance on the following question.
> >
> > Assume that under applicable law managers defending a conflict of
> > interest transaction have the burden of proving the "entire fairness"
> > of the challenged transaction. Clearly, if the transaction was
> > worthless to the entity, the analysis is simple. Likewise, if the
> > transaction was of value to the entity but the price was above the
> > price that would have been set through arm's length bargaining, the
> > transaction was not fair. Assume, however, that the price was the
> > arm's length price. Does the entire fairness analysis have to consider
>
> > the opportunity cost of the decision to invest entity funds in that
> > transaction rather than some other transaction?
> >
> > Thanks.
> >
> > (This question has also been posted to the LNET-LLC list serv.  Sorry
> > for the duplication for those who are subscribed both to this list and
> > that.)
> >
> > Daniel Kleinberger
> >
> > Professor Daniel S. Kleinberger
> > William Mitchell College of Law
> > 875 Summit Avenue
> > St. Paul, MN  55105
> > voice:   651/290-6387
> > fax:      651/290-6414
> > dkleinberger@wmitchell.edu
> >
> > ______________________________________________________________________
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>
>John H. Matheson
>Melvin C. Steen and Corporate Donors Professor of Law University of
>Minnesota Law School 229 19th Avenue South Minneapolis, Minnesota 55455
>612-625-3879 (phone) 612-625-2011 (fax) mathe001@umn.edu (e-mail)
>
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Received on Monday, 15 March 2004 17:41:06 GMT

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