In Re Southern Peru Copper Corp. Shareholder Derivative Litigation

OPINION

I. Introduction

This is the post-trial decision in an entire fairness case. The controlling stockholder of an NYSE-listed mining company came to the corporation’s independent directors with a proposition. How about you buy my non-publicly traded Mexican mining company for approximately $8.1 billion of your NYSE-listed stock? A special committee was set up to “evaluate” this proposal and it retained well-respected legal and financial advisors.

The financial advisor did a great deal of preliminary due diligence, and generated valuations showing that the Mexican mining company, when valued under a discounted cash flow and other measures, was not worth anything close to $3.1 billion. The $8.1 billion was a real number in the crucial business sense that everyone believed that the NYSE-listed company could in fact get cash equivalent to its stock market price for its shares. That is, the cash value of the “give” was known. And the financial advisor told the special committee that the value of the “get” was more than $1 billion less.

Rather than tell the controller to go mine himself, the special committee and its advisors instead did something that is indicative of the mindset that too often afflicts even good faith fiduciaries trying to address a controller. Having been empowered only to evaluate what the controller put on the table and perceiving that other options were off the menu because of the controller’s own objectives, the special committee put itself in a world where there was only one strategic option to consider, the one proposed by the controller, and thus entered a dynamic where at best it had two options, either figure out a way to do the deal the controller wanted or say no. Abandoning a focus on whether the NYSE-listed mining company would get $3.1 billion in value in the exchange, the special committee embarked on a “relative valuation” approach. Apparently perceiving that its own company was overvalued and had a fundamental value less than its stock market trading price, the special committee assured itself that a deal could be fair so long as the “relative value” of the two companies was measured on the same metrics. Thus, its financial advisor generated complicated scenarios pegging the relative value of the companies and obscuring the fundamental fact that the NYSE-listed company had a proven cash value. These scenarios all suggest that the special committee believed that the standalone value of the Mexican company (the “get”) was worth far less than the controller’s consistent demand for $3.1 billion (the “give”). Rather than reacting to these realities by suggesting that the controller make an offer for the NYSE-listed company at a premium to what the special committee apparently viewed as a plush market price, or making the controller do a deal based on the Mexican company’s standalone value, the special committee and its financial advisor instead took strenuous efforts to justify a transaction at the level originally demanded by the controller.

Even on that artificial basis, the special committee had trouble justifying a deal and thus other measures were taken. The cash flows of the Mexican company, but *64 not the NYSE-listed company, were “optimized.” The facts that the Mexican company was having trouble paying its bills, that it could not optimize its cash flows with its current capital base, and that, by comparison, the NYSE-listed company was thriving and nearly debt-free, were slighted. The higher multiple of the NYSE-listed company was used as the bottom range of an exercise to value the Mexican company, thus topping up the target’s value by crediting it with the multiple that the acquirer had earned for itself, an act of deal beneficence not characteristic of Jack Welch, and then another dollop of multiple creme fraiche was added to create an even higher top range. When even these measures could not close the divide, the special committee agreed to pay out a special dividend to close the value gap.

But what remained in real economic terms was a transaction where, after a bunch of back and forth, the controller got what it originally demanded: $3.1 billion in real value in exchange for something worth much, much less — hundreds of millions of dollars less. Even worse, the special committee, despite perceiving that the NYSE-listed company’s stock price would go up and knowing that the Mexican company was not publicly traded, agreed to a fixed exchange ratio. After falling when the deal was announced and when the preliminary proxy was announced, the NYSE-listed company’s stock price rose on its good performance in a rising market for commodities. Thus, the final value of its stock to be delivered to the controller at the time of the actual vote on the transaction was $3.75 billion, much higher than the controller’s original demand. Despite having the ability to rescind its recommendation and despite the NYSE-listed company having already exceeded the projections the special committee used for the most recent year by 37% and the Mexican company not having done so, the special committee maintained its recommendation and thus the deal was voted through.

Although the plaintiff in this case engaged in a pattern of litigation delay that compromised the reliability of the record to some extent and thus I apply a conservative approach to shaping a remedy, I am left with the firm conclusion that this transaction was unfair however one allocates the burden of persuasion under a preponderance of the evidence standard. A focused, aggressive controller extracted a deal that was far better than market, and got real, market-tested value of over $3 billion for something that no member of the special committee, none of its advisors, and no trial expert was willing to say was worth that amount of actual cash. Although directors are free in some situations to act on the belief that the market is wrong, they are not free to believe that they can in fact get $3.1 billion in cash for their own stock but then use that stock to acquire something that they know is worth far less than $3.1 billion in cash or in “fundamental” or “intrinsic” value terms because they believe the market is overvaluing their own stock and that on real “fundamental” or “intrinsic” terms the deal is therefore fair. In plain terms, the special committee turned the “gold” it was holding in trust into “silver” and did an exchange with “silver” on that basis, ignoring that in the real world the gold they held had a much higher market price in cash than silver. That non-adroit act of commercial charity toward the controller resulted in a manifestly unfair transaction.

I remedy that unfairness by ordering the controller to return to the NYSE-listed company a number of shares necessary to remedy the harm. I apply a conservative metric because of the plaintiffs delay, which occasioned some evidentiary uncertainties and which subjected the controller to lengthy market risk. The resulting *65 award is still large, but the record could justify a much larger award.

II. Factual Background

An overview of the facts is perhaps useful.

The controlling stockholder in this case is Grupo México, S.A.B. de C.V. The NYSE-listed mining company is Southern Peru Copper Corporation. 1 The Mexican mining company is Minera México, S.A. de C.V. 2

In February 2004, Grupo Mexico proposed that Southern Peru buy its 99.15% stake in Minera. At the time, Grupo Mexico owned 54.17% of Southern Peru’s outstanding capital stock and could exercise 63.08% of the voting power of Southern Peru, making it Southern Peru’s majority stockholder.

Grupo Mexico initially proposed that Southern Peru purchase its equity interest in Minera with 72.3 million shares of newly-issued Southern Peru stock. This “indicative” number assumed that Minera’s equity was worth $3.05 billion, because that is what 72.3 million shares of Southern Pei’u stock were worth then in cash. 3 By stark contrast with Southern Peru, Minera was almost wholly owned by Grupo Mexico and therefore had no market-tested value.

Because of Grupo Mexico’s self-interest in the merger proposal, Southern Peru formed a “Special Committee” of disinterested directors to “evaluate” the transaction with Grupo Mexico. 4 The Special Committee spent eight months in an awkward back and forth with Grupo Mexico over the terms of the deal before approving Southern Peru’s acquisition of 99.15% of Minera’s stock in exchange for 67.2 million newly-issued shares of Southern Peru stock (the “Merger”) on October 21, 2004. That same day, Southern Peru’s board of directors (the “Board”) unanimously approved the Merger and Southern Peru and Grupo Mexico entered into a definitive agreement (the “Merger Agreement”). On October 21, 2004, the market value of 67.2 million shares of Southern Peru stock was $3.1 billion. When the Merger closed on April 1, 2005, the value of 67.2 million shares of Southern Peru had grown to $3.75 billion.

This derivative suit was then brought against the Grupo Mexico subsidiary that owned Minera, the Grupo Mexico-affiliated directors of Southern Peru, and the members of the Special Committee, alleging that the Merger was entirely unfair to Southern Peru and its minority stockholders. The parties agree that the appropriate standard of review is entire fairness.

The crux of the plaintiffs argument is that Grupo Mexico received something demonstrably worth more than $3 billion (67.2 million shares of Southern Peru stock) in exchange for something that was not worth nearly that much (99.15% of *66 Minera). 5 The plaintiff points to the fact that Goldman Sachs, which served as the Special Committee’s financial advisor, never derived a value for Minera that justified paying Grupo Mexico’s asking price, instead relying on a “relative” valuation analysis that involved comparing the discounted cash flow (“DCF”) values of Southern Peru and Minera, and a contribution analysis that improperly applied Southern Peru’s own market EBITDA multiple (and even higher multiples) to Minera’s EBITDA projections, to determine an appropriate exchange ratio to use in the Merger. The plaintiff claims that, because the Special Committee and Goldman abandoned the company’s market price as a measure of the true value of the give, Southern Peru substantially overpaid in the Merger.

The defendants remaining in the case are Grupo Mexico and its affiliate directors who were on the Southern Peru Board at the time of the Merger. 6 These defendants assert that Southern Peru and Min-era are similar companies and were properly valued on a relative basis. In other *67 words, the defendants argue that the appropriate way to determine the price to be paid by Southern Peru in the Merger was to compare both companies’ values using the same set of assumptions and methodologies, rather than comparing Southern Peru’s market capitalization to Minera’s DCF value. The defendants do not dispute that shares of Southern Peru stock could have been sold for their market price at the time of the Merger, but they contend that Southern Peru’s market price did not reflect the fundamental value of Southern Peru and thus could not appropriately be compared to the DCF value of Minera.

With this brief overview of the basic events and the parties’ core arguments in mind, I turn now to a more detailed recitation of the facts as I find them after trial. 7

A. The Key Players

Southern Peru operates mining, smelting, and refining facilities in Peru, producing copper and molybdenum as well as silver and small amounts of other metals. Before the Merger, Southern Peru had two classes of stock: common shares that were traded on the New York Stock Exchange; and “Founders Shares” that were owned by Grupo Mexico, Cerro Trading Company, Inc., and Phelps Dodge Corporation (the “Founding Stockholders”). Each Founders Share had five votes per share versus one vote per share for ordinary common stock. Grupo Mexico owned 43.3 million Founders Shares, which translated to 54.17% of Southern Peru’s outstanding stock and 63.08% of the voting power. Southern Peru’s certificate of in *68 corporation and a stockholders’ agreement also gave Grupo Mexico the right to nominate a majority of the Southern Peru Board. The Grupo Mexico-affiliated directors who are defendants in this case held seven of the thirteen Board seats at the time of the Merger. Cerro owned 11.4 million Founders Shares (14.2% of the outstanding common stock) and Phelps Dodge owned 11.2 million Founders Shares (13.95% of the outstanding common stock). Among them, therefore, Grupo Mexico, Cerro, and Phelps Dodge owned over 82% of Southern Peru.

Grupo Mexico is a Mexican holding company listed on the Mexican stock exchange. Grupo Mexico is controlled by the Larrea family, and at the time of the Merger defendant Germán Larrea was the Chairman and CEO of Grupo Mexico, as well as the Chairman and CEO of Southern Peru. Before the Merger, Grupo Mexico owned 99.15% of Minera’s stock and thus essentially was Minera’s sole owner. Minera is a company engaged in the mining and processing of copper, molybdenum, zinc, silver, gold, and lead through its Mexico-based mines. At the time of the Merger, Minera was emerging from — if not still mired in — a period of financial difficulties, 8 and its ability to exploit its assets had been compromised by these financial constraints. 9 By contrast, Southern Peru was in good financial condition and virtually debt-free. 10

B. Grupo Mexico Proposes That Southern Peru Acquire Minera

In 2003, Grupo Mexico began considering combining its Peruvian mining interests with its Mexican mining interests. In September 2003, Grupo Mexico engaged UBS Investment Bank to provide advice with respect to a potential strategic transaction involving Southern Peru and Min-era.

Grupo Mexico and UBS made a formal presentation to Southern Peru’s Board on February 3, 2004, proposing that Southern Peru acquire Grupo Mexico’s interest in Minera from AMC in exchange for newly-issued shares of Southern Peru stock. In that presentation, Grupo Mexico characterized the transaction as “[Southern Peru] to acquire Minera [ ] from AMC in a stock for stock deal financed through the issuance of common shares; initial proposal to issue 72.3 million shares.” 11 A foot *69 note to that presentation explained that the 72.3 million shares was “an indicative number” of Southern Peru shares to be issued, assuming an equity value of Minera of $3.05 billion and a Southern Peru share price of $42.20 as of January 29, 2004. 12 In other words, the consideration of 72.3 million shares was indicative in the sense that Grupo Mexico wanted $3.05 billion in dollar value of Southern Peru stock for its stake in Minera, and the number of shares that Southern Peru would have to issue in exchange for Minera would be determined based on Southern Peru’s market price. As a result of the proposed merger, Min-era would become a virtually wholly-owned subsidiary of Southern Peru. The proposal also contemplated the conversion of all Founders Shares into a single class of common shares.

C. Southern Peru Forms A Special Committee

In response to Grupo Mexico’s presentation, the Board met on February 12, 2004 and created a Special Committee to evaluate the proposal. The resolution creating the Special Committee provided that the “duty and sole purpose” of the Special Committee was “to evaluate the [Merger] in such manner as the Special Committee deems to be desirable and in the best interests of the stockholders of [Southern Peru],” and authorized the Special Committee to retain legal and financial advisors at Southern Peru’s expense on such terms as the Special Committee deemed appropriate. 13 The resolution did not give the Special Committee express power to negotiate, nor did it authorize the Special Committee to explore other strategic alternatives.

For the purposes relevant to this decision, the Special Committee’s makeup as it was finally settled on March 12, 2004 was as follows:

• Harold S. Handelsman: Handelsman graduated from Columbia Law School and worked at Wachtell, Lipton, Rosen & Katz as an M & A lawyer before becoming an attorney for the Pritzker family interests in 1978. The Pritzker family is a wealthy family based in Chicago that owns, through trusts, a myriad of businesses. Handelsman was appointed to the Board in 2002 by Cerro, which was one of those Pritz-ker-owned businesses.

• Luis Miguel Palomino Bonilla: Palomino has a Ph.D in finance from the Wharton School at the University of Pennsylvania and worked as an economist, analyst and consultant for various banks and financial institutions. Palomino was nominated to the Board by Grupo Mexico upon the recommendation of certain Peruvian pension funds that held a large portion of Southern Peru’s publicly traded stock.

• Gilberto Perezalonso Cifuentes: Pere-zalonso has both a law degree and an MBA and has managed multi-billion dollar companies such as Grupo Telev-isa and AeroMexico Airlines. Pereza-lonso was nominated to the Board by Grupo Mexico.

• Carlos Ruiz Sacristán: Ruiz, who served as the Special Committee’s Chairman, worked as a Mexican government official for 25 years before co-founding an investment bank, where he advises on M & A and financing transactions. Ruiz was nominated to the Board by Grupo Mexico. 14

*70 D. The Special Committee Hires Advisors And Seeks A Definitive Proposal From Grupo Mexico

The Special Committee began its work by hiring U.S. counsel and a financial ad-visor. After considering various options, the Special Committee chose Latham & Watkins LLP and Goldman, Sachs & Co. The Special Committee also hired a specialized mining consultant to help Goldman with certain technical aspects of mining valuation. Goldman suggested consultants that the Special Committee might hire to aid in the process; after considering these options, the Special Committee retained Anderson & Schwab (“A & S”).

After hiring its advisors, the Special Committee set out to acquire a “proper” term sheet from Grupo Mexico. 15 The Special Committee did not view the most recent term sheet that Grupo Mexico had sent on March 25, 2004 as containing a price term that would allow the Special Committee to properly evaluate the proposal. For some reason the Special Committee did not get the rather clear message that Grupo Mexico thought Minera was worth $3.05 billion.

Thus, in response to that term sheet, on April 2, 2004, Ruiz sent a letter to Grupo Mexico on behalf of the Special Committee in which he asked for clarification about, among other things, the pricing of the proposed transaction. On May 7, 2004, Grupo Mexico sent to the Special Committee what the Special Committee considered to be the first “proper” term sheet, 16 making even more potent its ask.

E. The May 7 Term Sheet

Grupo Mexico’s May 7 term sheet contained more specific details about the proposed consideration to be paid in the Merger. It echoed the original proposal, but increased Grupo Mexico’s ask from $3.05 billion worth of Southern Peru stock to $3.147 billion. Specifically, the term sheet provided that:

The proposed value of Minera [] is US$4,3 billion, comprised of an equity value of US$3,147 million [sic] and US$1,153 million [sic] of net debt as of April 2004. The number of [Southern Peru] shares to be issued in respect to the acquisition of Minera [] would be calculated by dividing 98.84% of the equity value of Minera [ ] by the 20-day average closing share price of [Southern Peru] beginning 5 days prior to closing of the [Merger]. 17

In other words, Grupo Mexico wanted $3.147 billion in market-tested Southern Peru stock in exchange for its stake in Minera. The structure of the proposal, like the previous Grupo Mexico ask, shows that Grupo Mexico was focused on the dollar value of the stock it would receive.

*71 Throughout May 2004, the Special Committee’s advisors conducted due diligence to aid their analysis of Grupo Mexico’s proposal. As part of this process, A & S visited Minera’s mines and adjusted the financial projections of Minera management (ie., of Grupo Mexico) based on the outcome of their due diligence.

F. Goldman Begins To Analyze Grupo Mexico’s Proposal

On June 11, 2004, Goldman made its first presentation to the Special Committee addressing the May 7 term sheet. Although Goldman noted that due diligence was still ongoing, it had already done a great deal of work and was able to provide preliminary valuation analyses of the standalone equity value of Minera, including a DCF analysis, a contribution analysis, and a look-through analysis.

Goldman performed a DCF analysis of Minera based on long-term copper prices ranging from $0.80 to $1.00 per pound and discount rates ranging from 7.5% to 9.5%, utilizing both unadjusted Minera management projections and Minera management projections as adjusted by A & S. The only way that Goldman could derive a value for Minera close to Grupo Mexico’s asking price was by applying its most aggressive assumptions (a modest 7.5% discount rate and its high-end $1.00/lb long-term copper price) to the unadjusted Minera management projections, which yielded an equity value for Minera of $3.05 billion. By applying the same aggressive assumptions to the projections as adjusted by A & S, Goldman’s DCF analysis yielded a lower equity value for Minera of $2.41 billion. Goldman’s mid-range assumptions (an 8.5% discount rate and $0.90/lb long-term copper price) only generated a $1.7 billion equity value for Minera when applied to the A & S-adjusted projections. That is, the mid-range of the Goldman analysis generated a value for Minera (the “get”) a full $1.4 billion less than Grupo Mexico’s ask for the give.

It made sense for Goldman to use the $0.90 per pound long term copper price as a mid-range assumption, because this price was being used at the time by both Southern Peru and Minera for purposes of internal planning. The median long-term copper price forecast based on Wall Street research at the time of the Merger was also $0.90 per pound.

Goldman’s contribution analysis applied Southern Peru’s market-based sales, EBITDA, and copper sales multiples to Minera. This analysis yielded an equity value for Minera ranging only between $1.1 and $1.7 billion. Goldman’s look-through analysis, which was a sum-of-the-parts analysis of Grupo Mexico’s market capitalization, generated a maximum equity value for Minera of $1.3 billion and a minimum equity value of only $227 million.

Goldman summed up the import of these various analyses in an “Illustrative Give/ Get Analysis,” which made patent the stark disparity between Grupo Mexico’s asking price and Goldman’s valuation of Minera: Southern Peru would “give” stock with a market price of $3.1 billion to Grupo Mexico and would “get” in return an asset worth no more than $1.7 billion. 18

The important assumption reflected in Goldman’s June 11 presentation that a bloc of shares of Southern Peru could yield a cash value equal to Southern Peru’s actual stock market price and was thus worth its market value is worth pausing over. At trial, the defendants disclaimed any reli- *72 anee upon a claim that Southern Peru’s stock market price was not a reliable indication of the cash value that a very large bloc of shares — such as the 67.2 million paid to Grupo Mexico — could yield in the market. 19 Thus, the price of the “give” was always easy to discern. The question thus becomes what was the value of the “get.” Unlike Southern Peru, Minera’s value was not the subject of a regular market test. Minera shares were not publicly traded and thus the company was embedded in the overall value of Grupo Mexico.

The June 11 presentation clearly demonstrates that Goldman, in its evaluation of the May 7 term sheet, could not get the get anywhere near the give. Notably, that presentation marked the first and last time that a give-get analysis appeared in Goldman’s presentations to the Special Committee.

What then happened next is curious. The Special Committee began to devalue the “give” in order to make the “get” look closer in value.

The DCF analysis of the value of Minera that Goldman presented initially caused concern. As Handelsman stated at trial, “when [the Special Committee] thought that the value of Southern Peru was its market value and the value of Minera [ ] was its discounted cash flow value ... *73 those were very different numbers.” 20 But, the Special Committee’s view changed when Goldman presented it with a DCF analysis of the value of Southern Peru on June 23, 2004.

In this June 23 presentation, Goldman provided the Special Committee with a preliminary DCF analysis for Southern Peru analogous to the one that it had provided for Minera in the June 11 presentation. But, the discount rates that Goldman applied to Southern Peru’s cash flows ranged from 8% to 10% instead of 7.5% to 9.5%. Based on Southern Peru management’s projections, the DCF value generated for Southern Peru using mid-range assumptions (a 9% discount rate and $0.90/lb long-term copper price) was $2.06 billion. This was about $1.1 billion shy of Southern Peru’s market capitalization as of June 21, 2004 ($3.19 billion). Those values “comforted” the Special Committee. 21

Again, one must pause over this. “Comfort” is an odd word in this context. What Goldman was basically telling the Special Committee was that Southern Peru was being overvalued by the stock market. That is, Goldman told the Special Committee that even though Southern Peru’s stock was worth an obtainable amount in cash, it really was not worth that much in fundamental terms. Thus, although Southern Peru had an actual cash value of $3.19 billion, its “real,” “intrinsic,” 22 or “fundamental” value was only $2.06 billion, and giving $2.06 billion in fundamental value for $1.7 billion in fundamental value was something more reasonable to consider.

Of course, the more logical reaction of someone not in the confined mindset of directors of a controlled company may have been that it was a good time to capitalize on the market multiple the company was getting and monetize the asset.

A third party in the Special Committee’s position might have sold at the top of the market, or returned cash to the Southern Peru stockholders by declaring a special dividend. For example, if it made long-term strategic sense for Grupo Mexico to consolidate Southern Peru and Minera, there was a logical alternative for the Special Committee: ask Grupo Mexico to make a premium to market offer for Southern Peru. Let Grupo Mexico be the buyer, not the seller. If the Special Committee’s distinguished bankers believed that Southern Peru was trading at a premium to fundamental value, why not ask Grupo Mexico to make a bid at a premium to that price? By doing so, the Special Committee would have also probed Grupo Mexico about its own weaknesses, including the fact that Minera seemed to be cash-strapped, having trouble paying its regular bills, and thus unable to move forward with an acquisition of its own. That is, if Grupo Mexico could not buy despite the value it held in Minera, that would bespeak weakness and cast doubt on the credibility of its ask. And if it turned out that Grupo Mexico would buy at a premium, the minority stockholders of Southern Peru would benefit.

*74 In other words, by acting like a third-party negotiator with its own money at stake and with the full range of options, the Special Committee would have put Grupo Mexico back on its heels. Doing so would have been consistent with the financial advice it was getting and seemed to accept as correct. The Special Committee could have also looked to use its market-proven stock to buy a company at a good price (a lower multiple to earnings than Southern Peru’s) and then have its value rolled into Southern Peru’s higher market multiple to earnings. That could have included buying Minera at a price equal to its fundamental value using Southern Peru’s market-proven currency.

Instead of doing any of these things, the Special Committee was “comforted” by the fact that they could devalue that currency and justify paying more for Minera than they originally thought they should. 23

G. The Special Committee Moves Toward Relative Valuation

After the June 23, 2004 presentation, the Special Committee and Goldman began to embrace the idea that the companies should be valued on a relative basis. In a July 8, 2004 presentation to the Special Committee, Goldman included both a revised standalone DCF analysis of Minera and a “Relative Discounted Cash Flow Analysis” in the form of matrices present ing the “indicative number” of Southern Peru shares that should be issued to acquire Minera based on various assumptions. 24 The relative DCF analysis generated a vast range of Southern Peru shares to be issued in the Merger of 28.9 million to 71.3 million. Based on Southern Peru’s July 8, 2004 market value of $40.30 per share, 28.9 million shares of Southern Peru stock had a market value of $1.16 billion, and 71.3 million shares were worth $2.87 billion. 25 In other words, even the highest equity value yielded for Minera by this analysis was short of Grupo Mexico’s actual cash value asking price.

The revised standalone DCF analysis applied the same discount rate and long-term copper price assumptions that Goldman had used in its June 11 presentation to updated projections. This time, by applying a 7.5% discount rate and $1.00 per pound long-term copper price to Minera management’s projections, Goldman was only able to yield an equity value of $2.8 billion for Minera. Applying the same aggressive assumptions to the projections as adjusted by A & S generated a standalone equity value for Minera of only $2.085 billion. Applying mid-range assumptions (a discount rate of 8.5% and $0.90/lb long-term copper price) to the A & S-adjusted projections yielded an equity value for Minera of only $1.358 billion.

H. The Special Committee Makes A Counterproposal And Suggests A Fixed Exchange Ratio

After Goldman’s July 8 presentation, the Special Committee made a counterpropo- *75 sal to Grupo Mexico that was (oddly) not mentioned in Southern Peru’s proxy statement describing the Merger (the “Proxy Statement”). In this counterproposal, the Special Committee offered that Southern Peru would acquire Minera by issuing 52 million shares of Southern Peru stock with a then-current market value of $2.095 billion. 26 The Special Committee also proposed implementation of a fixed, rather than a floating, exchange ratio that would set the number of Southern Peru shares issued in the Merger. 27

From the inception of the Merger, Gru-po Mexico had contemplated that the dollar value of the price to be paid by Southern Peru would be fixed (at a number that was always north of $3 billion), while the number of Southern Peru shares to be issued as consideration would float up or down based on Southern Peru’s trading price around the time of closing. But, the Special Committee was uncomfortable with having to issue a variable amount of shares in the Merger. Handelsman testified that, in its evaluation of Grupo Mexico’s May 7 term sheet, “it was the consensus of the [Special Committee] that a floating exchange rate was a nonstarter” because “no one could predict the number of shares that [Southern Peru] would have to issue in order to come up with the consideration requested.” 28 The Special Committee wanted a fixed exchange ratio, which would set the number of shares that Southern Peru would issue in the Merger at the time of signing. The dollar value of the Merger consideration at the time of closing would vary with the fluctuations of Southern Peru’s market price. According to the testimony of the Special Committee members, their reasoning was that both Southern Peru’s stock and the copper market had been historically volatile, and a fixed exchange ratio would protect Southern Peru’s stockholders from a situation in which Southern Peru’s stock price went down and Southern Peru would be forced to issue a greater number of shares for Minera in order to meet a fixed dollar value. 29 As I will discuss later, that position is hard to square with the Special Committee and Southern Peru’s purported bullishness about the copper market in 2004. 30

I. Grupo Mexico Sticks To Its Demand

In late July or early August, Grupo Mexico responded to the Special Committee’s counterproposal by suggesting that Southern Peru should issue in excess of 80 million shares of common stock to purchase Minera. It is not clear on the record exactly when Grupo Mexico asked for 80 million shares, but given Southern Peru’s trading history at that time, the market value of that consideration would have been close to $3.1 billion, basically the same place where Grupo Mexico had started. 31 The Special Committee viewed Gru-po Mexico’s ask as too high, which is not *76 surprising given that the parties were apparently a full billion dollars in value apart, and negotiations almost broke down.

But, on August 21, 2004, after what is described as “an extraordinary effort” in Southern Peru’s Proxy Statement, Grupo Mexico proposed a new asking price of 67 million shares. 32 On August 20, 2004, Southern Peru was trading at $41.20 per share, so 67 million shares were worth about $2.76 billion on the market, a drop in Grupo Mexico’s ask. 33 Grupo Mexico’s new offer brought the Special Committee back to the negotiating table.

After receiving two term sheets from Grupo Mexico that reflected the 67 million share asking price, the second of which was received on September 8, 2004, when 67 million shares had risen to be worth $3.06 billion on the market, 34 Goldman made another presentation to the Special Committee on September 15, 2004. In addition to updated relative DCF analyses of Southern Peru and Minera (presented only in terms of the number of shares of Southern Peru stock to be issued in the Merger), this presentation contained a “Multiple Approach at Different EBITDA Scenarios,” which was essentially a comparison of Southern Peru and Minera’s market-based equity values, as derived from multiples of Southern Peru’s 2004 and 2005 estimated (or “E”) EBITDA. 35 Goldman also presented these analyses in terms of the number of Southern Peru shares to be issued to Grupo Mexico, rather than generating standalone values for Minera. The range of shares to be issued at the 2004E EBITDA multiple (5.0x) was 44 to 54 million; at the 2005E multiple (6.3x) Goldman’s analyses yielded a range of 61 to 72 million shares of Southern Peru stock. 36 Based on Southern Peru’s $45.34 share price as of September 15, 2004, 61 to 72 million shares had a cash value of $2.765 billion to $3.26 billion. 37

The Special Committee sent a new proposed term sheet to Grupo Mexico on September 23, 2004. That term sheet provided for a fixed purchase price of 64 million shares of Southern Peru (translating to a $2.95 billion market value based on Southern Peru’s then-current closing price). 38 The Special Committee’s proposal contained two terms that would protect the minority stockholders of Southern Peru: (1) a 20% collar around the purchase price, which gave both the Special Committee and Grupo Mexico the right to walk away from the Merger if Southern Peru’s stock price went outside of the collar before the stockholder vote; and (2) a voting provision requiring that a majority of the minority stockholders of Southern Peru vote in favor of the Merger. Additionally, the proposal called for Minera’s net debt, which Southern Peru was going to absorb *77 in the Merger, to be capped at $1.105 billion at closing, and contained various corporate governance provisions.

J. Grupo Mexico Rejects Many Of The Special Committee’s Proposed Terms But The Parties Work Out A Deal

On September 30, 2004, Grupo Mexico sent a counterproposal to the Special Committee, in which Grupo Mexico rejected the Special Committee’s offer of 64 million shares and held firm to its demand for 67 million shares. Grupo Mexico’s counter-proposal also rejected the collar and the majority of the minority vote provision, proposing instead that the Merger be conditioned on the vote of two-thirds of the outstanding stock. Grupo Mexico noted that conditioning the Merger on a two-thirds shareholder vote obviated the need for the walk-away right requested by the Special Committee, because Grupo Mexico would be prevented from approving the Merger unilaterally in the event the stock price was materially higher at the time of the stockholder vote than at the time of Board approval. Grupo Mexico did accept the Special Committee’s proposed $1.05 billion debt cap at closing, which was not much of a concession in light of the fact that Minera was already contractually obligated to pay down its debt and was in the process of doing so. 39

After the Special Committee received Grupo Mexico’s September 30 counterpro-posal, the parties reached agreement on certain corporate governance provisions to be included in the Merger Agreement, some of which were originally suggested by Grupo Mexico and some of which were first suggested by the Special Committee. Without saying these provisions were of no benefit at all to Southern Peru and its outside investors, let me just say that they do not factor more importantly in this decision because they do not provide any benefit above the protections of default law that were economically meaningful enough to close the material dollar value gap that existed.

On October 5, 2004, members of the Special Committee met with Grupo Mexico to iron out a final deal. At that meeting, the Special Committee agreed to pay 67 million shares, dropped their demand for the collar, and acceded to most of Grupo Mexico’s demands. The Special Committee justified paying a higher price through a series of economic contortions. The Special Committee was able to “bridge the gap” 40 between the 64 million and the 67 million figures by decreasing Minera’s debt cap by another $105 million, and by getting Grupo Mexico to cause Southern Peru to issue a special dividend of $100 million, which had the effect of decreasing the value of Southern Peru’s stock. According to Special Committee member Handelsman, these “bells and whistles” 41 *78 made it so that “the value of what was being ... acquired in the merger went up, and the value of the specie that was being used in the merger went down ... 42 giving the Special Committee reason to accept a higher Merger price.

The closing share price of Southern Peru was $53.16 on October 5, 2004, so a purchase price of 67 million shares had a market value of $8.56 billion, 43 which was higher than the dollar value requested by Grupo Mexico in its February 2004 proposal or its original May 7 term sheet.

At that point, the main unresolved issue was the stockholder vote that would be required to approve the Merger. After further negotiations, on October 8, 2004, the Special Committee gave up on its proposed majority of the minority vote provision and agreed to Grupo Mexico’s suggestion that the Merger require only the approval of two-thirds of the outstanding common stock of Southern Peru. 44 Given the size of the holdings of Cerro and Phelps Dodge, 45 Grupo Mexico could achieve a two-thirds vote if either Cerro or Phelps Dodge voted in favor of the Merger.

K. The Multi-Faceted Dimensions Of Controlling Power: Large Stockholders Who Want To Get Out Support A Strategic, Long-Term Acquisition As A Prelude To Their Own Exit As Stockholders

Human relations and motivations are complex. One of the members of the Special Committee, Handelsman, represented a large Founding Stockholder, Cerro. This might be seen in some ways to have ideally positioned Handelsman to be a very aggressive negotiator. But Handelsman had a problem to deal with, which did not involve Cerro having any self-dealing interest in the sense that Grupo Mexico had. Rather, Grupo Mexico had control over Southern Peru and thus over whether Southern Peru would take the steps necessary to make the Founding Stockholders’ shares marketable under applicable securities regulations. 46 Cerro and Phelps Dodge, consistent with its name, wanted to monetize their investment in Southern Peru and get out.

Thus, while the Special Committee was negotiating the terms of the Merger, Han-delsman was engaged in negotiations of his own with Grupo Mexico. 47 Cerro and Phelps Dodge had been seeking registra *79 tion rights from Grupo Mexico (in its capacity as Southern Peru’s controller) for their shares of Southern Peru stock, which they needed because of the volume restrictions imposed on affiliates of an issuer by SEC Rule 144. 48

It is not clear which party first proposed liquidity and support for the Founding Stockholders in connection with the Merger. But it is plain that the concept appears throughout the term sheets exchanged between Grupo Mexico and the Special Committee, and it is clear that Handelsman knew that registration rights would be part of the deal from the beginning of the Merger negotiations and that thus the deal would enable Cerro to sell as it desired. The Special Committee did not take the lead in negotiating the specific terms of the registration rights provisions — rather, it took the position that it wanted to leave the back-and-forth over the agreement details to Cerro and Grupo Mexico. Handelsman, however, played a key role in the negotiations with Grupo Mexico on Cerro’s behalf. 49

At trial, Handelsman explained that there were two justifications for pursuing registration rights — one offered benefits exclusive to the Founding Stockholders, and the other offered benefits that would inure to Southern Peru’s entire stockholder base. The first justification was that Cerro needed the registration rights in order to sell its shares quickly, and Cerro wanted “to get out” of its investment in Southern Peru. 50 The second justification concerned the public market for Southern Peru stock. Granting registration rights to the Founding Stockholders would allow Cerro and Phelps Dodge to sell their shares, increasing the amount of stock traded on the market and thus increasing Southern Peru’s somewhat thin public float. This would in turn improve stockholder liquidity, generate more analyst exposure, and create a more efficient market for Southern Peru shares, all of which would benefit the minority stockholders. Handelsman thus characterized the registration rights situation as a “win-win,” because “it permitted us to sell our stock” and “it was good for [Southern Peru] because they had a better float and they had a more organized sale of shares.” 51

Handelsman’s tandem negotiations with Grupo Mexico culminated in Southern Peru giving Cerro registration rights for its shares on October 21, 2004, the same day that the Special Committee approved the Merger. In exchange for registration rights, Cerro expressed its intent to vote its shares in favor of the Merger if the Special Committee recommended it. If the Special Committee made a recommendation against the Merger, or withdrew its rec