Defendant MHR Fund Management LLC (“MHR”), a controlling stockholder of Loral Space and Communications, Inc. (“Loral”), negotiated a $300 million equity investment in Loral so Loral could expand its operations. A Special Committee was formed by Loral to negotiate the deal, members of which had material personal and business ties to MHR. In addition, Loral’s board of directors consisted of a majority of MHR-affiliated individuals. The Court analyzed the transaction under the entire fairness standard, holding that (a) flaws in the composition of the Special Committee precluded fair dealing at arms length, and (b) the terms of the deal itself were highly favorable to MHR. First, the passive Special Committee eschewed good process by acting quickly, blowing off an expression of interest by Goldman Sachs to invest and failing to conduct any other type of market check to seek out better terms for capital infusion. Second, the terms of the deal were unfair, as the convertible preferred stock offered as consideration had high dividend rates, low conversion rates, and gave MHR an effective “chokehold” on Loral’s future through equity control and veto rights. As a remedy, the Court adjusted the consideration price to compensate for MHR’s access to inside information, the deal’s insulation from market pressures and Loral’s actual stock trading price.
