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Interested Party Transactions: Lessons from Loral

January 16, 2009

By Robert R. Carlson, Scott B. Joachim and Stanley C. Liu

The recent Memorandum Opinion issued by Vice Chancellor Strine of the Delaware Court of Chancery, In re Loral Space and Communications Inc., highlights many of the critical legal and practical requirements that a board of directors must follow when considering an interested-party transaction (i.e., a transaction in which a director, stockholder or other constituent of the corporation is on both sides of the same transaction).

In Loral, Vice Chancellor Strine held that (1) the entire fairness standard applied to the courts review of the terms of a sale of convertible preferred stock from Loral Space and Communications, Inc. (Loral) to its major stockholder, MHR Fund Management LLC (MHR), and (2) the terms of the sale were unfair to Loral and its other stockholders under that heightened standard of judicial scrutiny. The court applied the fairly uncommon equitable remedy of reforming the terms of the salerather than voiding the sale outright or providing for legal damages. The court modified the terms of the sale to comport with terms that the court determined would have been agreed upon through an arms-length negotiation.