In re Digex Shareholders Litigation

WorldCom, Inc. (defendant) entered into a merger agreement with Intermedia Communications, Inc. (Intermedia) (defendant). Intermedia was the controlling shareholder of Digex, Inc. (defendant). After the merger, WorldCom would possess over 85 percent of Digex’s voting power but under 85 percent of Digex’s outstanding voting shares. Four members of the Digex board of directors were affiliated with Intermedia. The four Intermedia-affiliated board members voted to waive the protections of § 203 of the Delaware General Corporation Law (DGCL). Three independent directors advised the board against waiving § 203 protections and voted against the waiver. Absent the waiver, § 203 would prevent WorldCom from engaging in a business combination with Digex for three years after the WorldCom–Intermedia merger unless WorldCom owned at least 85 percent of Digex’s voting stock. The lawyers who advised the parties disagreed as to whether the 85 percent exception referred to WorldCom’s Digex voting power or the number of shares WorldCom held as a percentage of Digex’s outstanding shares. Digex’s minority shareholders (plaintiffs) moved to preliminarily enjoin the merger or the § 203 waiver, claiming that the four interested Digex directors breached their fiduciary duty by voting to waive § 203’s protections. WorldCom, Intermedia, and Digex argued that even if the waiver was invalid, WorldCom would be exempt from § 203 because it would possess over 85 percent of Digex voting power after the merger and the waiver was fair to Digex shareholders.