United States: CDX Holdings, Inc. v. Fox: Chancery Court's Decision Is Affirmed, But Dissent Blasts Use Of "Hindsight Bias" Analysis

On June 6, 2016, the Supreme Court of Delaware affirmed a decision of the Chancery Court finding that corporate directors and officers involved in a sales transaction breached a contract with option holders to fairly value their options (see here for a thorough explanation of the Chancery Court decision, and in particular, the Court's criticism of the retained financial advisers that provided a valuation analysis).  The Supreme Court decision also included a disproportionately lengthy dissent condemning both the Chancery Court's findings and its reliance on "social science studies" to reach them.

The underlying action arose out of a sale transaction involving the businesses of Caris Life Sciences, Inc. ("Caris").  To secure financing for two of its subsidiaries, Caris opted to sell off a third subsidiary in the fall of 2011 to Miraca Holdings, Inc. ("Miraca").  In an effort to minimize the tax consequences of the sale, Caris structured the transaction as a "spin merge," whereby Caris transferred ownership of the two subsidiaries to a new subsidiary, which it then spun-off to stockholders.  At that point, owning only the third subsidiary that it wished to sell, Caris simply merged with Miraca, which paid Caris stockholders $725 million in the deal.

More than 97% of Caris' stock was held by its founder, David Halbert, and an investment fund, JH Whitney VI, L.P.  Halbert and JH Whitney received more than $560 million as part of the Miraca transaction.  Most of the equity in Caris not owned by Halbert or JH Whitney (2.9%) consisted of stock options that were cancelled in connection with the Miraca transaction, with each holder having the right under a 2007 Stock Incentive Plan (the "Plan") to receive for each covered share the amount by which the fair market value of the share exceeded the option exercise price.  The Plan required the Caris Board to determine the value the option holders would receive.  Caris determined that the spun-off entities had a value of $65 million and that the option holders were entitled to $0.61 per option.

The option holders brought suit, alleging that Caris breached the Plan because, among other things: (i) Caris management, not the Board, determined how much the option holders would receive; and (ii) the per share valuation attributed to the spun-off entities was not a good faith determination of fair market value.  The action was tried in the Chancery Court before Vice Chancellor Laster in December 2014.  The Chancery Court found for plaintiffs, holding that Caris had breached the Plan.  First, the Chancery Court found that the evidence revealed that the Board never made the fair market value determination it was supposed to make.  Rather, that task was delegated to Caris officers under the supervision of Halbert.  Second, the Chancery Court found that the Caris officers themselves had not made a good faith attempt to determine fair market value of the spun-off entities.  They had instead selected figures, in conjunction with Caris' tax adviser, that would ensure the spin-off and sale would result in zero tax consequences.  The Chancery Court observed that while Caris' witnesses "testified with conviction" that they believed that the spun-off entities had "very little value in fall 2011," contemporaneous evidence showed that the directors subjectively believed the spun-off entities had a fair market value of "around $300 million"—almost five times what the valuation turned out to be.  The Chancery Court attributed the discrepancy between the defense witnesses' trial testimony and evidence from 2011 to "hindsight bias"—the "tendency for people with outcome knowledge to believe falsely that they would have predicted the reported outcome of an event."  In finding for plaintiffs, the Chancery Court awarded damages of an additional $16.3 million to the option holders for their interest.

Caris appealed.  On June 6, 2016, the Delaware Supreme Court affirmed the lower court's decision.  In so doing, the Supreme Court gave "deference" to the findings of the Chancery Court, noting that its decision was "supported by the record [and] the product of an orderly and logical deductive reasoning process."  In particular, the Supreme Court referenced the Chancery Court's assessment of the Caris witnesses' credibility and decision "not to credit their unsubstantiated trial testimony," finding that such decision was not clearly erroneous.

The Supreme Court's decision was not unanimous, however.  Justice Valihura wrote a lengthy dissent that was sharply critical of the Chancery Court's decision and supporting analysis.  First, Justice Valihura observed that the Chancery Court improperly made no findings supporting the conclusion that the Caris Board acted in bad faith (and instead found that Board had not "acted" at all).  Justice Valihura stated that the Board had "acted" in the following ways: (i) meeting with legal counsel and hiring an independent adviser to assist directors in determining fair market value; (ii) meeting with its financial adviser and reviewing a valuation analysis; and (iii) adopting a resolution of the Board.  According Justice Valihura, "Boards are permitted to consult with financial advisors when determining a company's value."

Second, Justice Valihura stated that the Chancery Court's rejection of the Caris' directors' trial testimony, and attribution of "hindsight bias," was improper: "In my view, this Court should be skeptical of court rulings predicated upon social science studies, particularly where, as here, such theories impact a trial court's own post-trial impressions of the testimony offered."  Indeed, Justice Valihura noted that Vice Chancellor Laster, in an immediate post-trial reaction, stated that "the credibility of the people on the [B]oard" was "very, very strong."  However, when employing his hindsight bias theory in his decision, Vice Chancellor Laster found that the Caris defense witnesses did not subjectively believe in a low valuation of the spun-off entities.  Justice Valihura concluded that the Chancery Court's "blanket rejection of thoughtful and consistent testimony by [the Caris] directors . . . does not logically follow from the evidence or from the Court's own favorable post-trial impressions of the directors' testimony."

While the CDX Holdings majority ultimately gave deference to the findings of the Chancery Court, Justice Valihura's dissent offers an interesting opposing view regarding what constitutes Board "action," as well as the propriety of using social science studies to determine credibility.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Events from this Firm
1 Oct 2019, Other, Washington, DC, United States

Orrick is proud to host the AIPN for its final breakfast meeting of 2019 for a session titled “Helping the World Gasify”. As natural gas production and use is very unevenly distributed throughout the world, often gas produced in association with crude oil is sold below cost or flared.

25 Nov 2019, Speaking Engagement, New York, United States

Lorraine McGowen will be speaking on the upcoming “Evaluating the Financial Health of an Entity” panel at the New York session of the Pocket MBA: Finance for Lawyers and Other Professionals program, hosted by the Practising Law Institute.

2 Dec 2019, Speaking Engagement, New York, United States

Evan Hollander will co-chair the Practising Law Institute’s annual Nuts and Bolts of Corporate Bankruptcy this year.

In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions