In re Emerging Communications, Inc. Shareholders Litigation

Emerging Communications, Inc. (ECM) (defendant) was a publicly-traded corporation. Its chairman and CEO, Jeffrey Prosser (defendant), controlled 52 percent of ECM’s stock through a company he owned called Innovative Communication Company, LLC (ICC) (defendant). Prosser sought to take ECM private through a two-step merger. In July 1998 he provided the company’s data to a lender which determined that ECM’s stock was worth roughly $28 per share. The lender agreed to provide financing for Prosser to offer as much as $11.40 per share. The estimate of $28 per share factored in projections from June 1998 which were considerably more positive than those from prior months. Prosser proposed to ECM’s board a two-step privatization in which ICC would make a tender offer of $9.125 per share, followed by a cash-out merger at the same price. ECM formed a special committee to consider the proposal. Prosser did not make the June projections available to the committee; they operated on assumptions from the March 1998 projection, which reflected a weaker share price. The committee rejected the $9.125 price and negotiated up to $10.25 per share. At that point, Prosser stated that he could go no higher due to financing restrictions. The committee hired a financial consultant, which opined that the $10.25 price would be fair to the minority shareholders. On that basis the committee recommended Prosser’s proposal to the board as a whole, which voted in favor. Like the committee and the financial consultant, the larger board lacked the June projection information, though at least one member had sufficient background to recognize that the $10.25 was on the low end of what would be fair. Other board members relied on Prosser to support their businesses in other capacities, and all were paid significant fees for their service on the board. After Prosser increased his holdings through the tender offer, the second-step merger was presented to the board and shareholders and was approved. Dissenting shareholders (plaintiffs) sued ECM, ICC, and ECM’s directors, seeking both an appraisal and damages for breach of fiduciary duty. ECM’s corporate charter included a provision exempting its directors from liability for breach of the duty of care.