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EXHIBIT "B"

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1999 DeL. Ch. LE., j 211 printed in FULL format.

BOMAO, INC.,et aI., Petitioners, v. INTERNATIONAL TELECHAGE, INC., Respondent. BOMAKO, INC., ét aI., Plaintiffs, v. RONALD J. HA, et al., Defendants.
C.A. No. 13052, C.A. No. 14727

COURT OF, CHACERY OF DELAWARE, NEW CASTLE

1999 DeL. Ch. LEXIS 211

August 20, 1999, Submitted November 4, 1999, Decided

SUBSEQUENT HISTORY: (*1)

Released for Publication by the Court November 9, 1999. As Revised November
16~ 1999.

DISPOSITION: Plaintiffs awarded the sum of $ 2.58 per share for each of the 2,181,682 common shares of ITI held by them as of the effective date of the Merger, plus 8.37% simple interest from'that date until the date judgment is entered. Coungel for plaintiffs is directed to submit an order, on notice,

within 10 days. -

CASE SUMMY
PROCEDURAL POSTURE: Plaintiffs minority shareholders 'filed an appraisal action and breach of fiduciary duty action against defendants, the company's chairman and chief executive officer (CEO) and other directors, in connection with a merger in which the shares of the company were cashed-out and it was merged into a corporation wholly-owned by the CEO.

OVERVIEW: Plaintiffs minority shareholders brought suit for appraisal and for breach of fiduciary duty against defendants, the company's chairman and chief of a breach of the
executive officer (CEO) and other directors. Finding evidence

duty of loyalty sufficient to rebut application of the business judgment rul~, the court reviewed the merger under the entire fairness standard of review. The court concluded that defendant (CEO) failed to carry his burden of proving that merger was entirely fair to the shareholders. The CEO's tailure to disclose' the material facts and his diversion of needed financing infected all subsequent events, thus rendering ineffectual the procedures employed by the other directors to ensure an independent and fair process and result. The court then held that plaintiffs were entitled to receive what their shares would have been' worth at the time of the merger if the CEO had not breached his fiduciary

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duties.
OUTCOME: Judgmént for plaintiffs minority shareholders on their claim for breach of fiduciary duty action; defendants failed to carry their burden of proving the entire fairness of the merger.' The appraisal action was not decided because it was unnecessary to do so.
CORE, TERMS: merger, financing, restructuring, special committee, shareholder, negotiation, per share, stockholder, comparable, appraisal, network, accounts receivable, proxy statement, fiducia~y, minutes, board of directors, fair value, receivable, sheet, duty of lóyalty, board meeting, restructure, disgorgement, misconduct, long-term, chairman, disloyal, lender, stock, disloyalty
CORE CONCEPTS ,Business

& Corporate Entities: Shareholders & Other Constituents: Actions Against Corporations In trying a consolidated fraud and appraisal action, the chancery court should first evaluate the fraud claims.

Business & Corporate Entities: Shareholders & Other Constituents: Actions Against Corporations The court may incorporate elements of rescissory damages into its determination of fair price if it considers such elements: (1) susceptible to proof; and (2) appropriate under the circumstances.
Business & Corporate Entities: Shareholders & Other Constituents: Actions Against Corporations The court's inquiry into the fairness of a merger is structl.redso that regardless of the court's substantive findings, the plaintiffs are limited to, and statutorily assured of, a single recovery.
Business & Corporate Entities: Directors_ & Officers: Duties & Liabilities Even where it initially applies, the business judgment rule is rebutted if there is evidence of disloyalty, including, for example, the motives of entrenchment, fraud upon the corporation or the board, abdication of directorial duty or the sale of one's vote.

Business & Corporate Entities: Directors & Officers: Duties & Liabilities The court's reluctance to assess the merits of a business decision ends in the face of illicit manipulation of a board's deliberative processes by self-interested corporate fiduçiaries. Business & Corporate Entities: Directors & Officers: Duties & Liabilities
Where evidence of a breach of the duty of loyalty sufficient to

rebut

application of the business judgment rule is found, the court reviews the

transaction under the entire fairness standard of review. .

Business & Corporate Entities: Directors & Officers: Duties & Liabilities When the entire faiiness test applies, the burden of persuasion initially lies the defendants to with the defendant. The burden of proof may be shifted from

the plaintiff through the use of a well functioning committee of independent

directors.

Business & Corporate Entities: Directors & Officers: Duties & Liabilities

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Mergers & Acquisitions Law: Corporate Law & General Business Considerations: Duties & Liabilities of Directors & Officers The mere existence of an independent special committee does not itself shift the burden. At least two factors are required. First, the majority shareholder must not dictate the terms of the merger. Second, the special committee must have real bargaining power that it can exercise with the majority shareholder on an

arms length basis.

Mergers & Acquisitions Law: Corporate Law & General Business Considerations: Duties & Liabilities of Directors & Officers There are two components to the concept of entire fairness: fair dealing and fair price. Fair dealing embraces questions of when the transaction was timed, initiated, structured, negotiated, disclosed to the directors, and how it was how the approvals of the directors and the stockholders were obtained. Fair price relates to thé economic and financial considerations of the proposed merger, including all relevant factors: assets, market value, earnings, future prospects, and any other elements that affect the intrinsic or inherent value of a company's stock. In making a determination as to the entire fairness of a transaction, the, court does not focus on one component over the other, but

examnes all aspects of the issue as a whole.

Business & Corporate Entities: Shareholders & Other Constituents: Duties & ' Liabili ties of Controlling Shareholders Mergers & Acquisitions Law: Corporate Law & General Business Considerations: Duties & Liabilities of Directors & Officers The "fair dealing" element of the entire fairness analysis also embraces the duty of candor owed by corporate fiduciaries to disclose all material information relevant to corporate decisions from which they may derive a personal benefit. The duty of candor, integral to fair dealing, dictates that not use superíor information or fiduciaries, corporate or otherwise, may knowledge to mislead others in the performance of their own fiduciary

obligations.

Business & Corporate Entities: Shareholders & Other Constituents: Meetings, Voting & Agreements A fact is material and must be disclosed if a reasonable stockholder would consider the fact important in deciding how to vote.

Business & Corporate Entities: Directors & Officers The entire fairness analysis, though structurally bifurcated, is conceptually singular. All aspects of a transaction are cònsidered in determining whether the challenged transaction is entirely fair.

Business & Corporate Entities: Shareholders & Other Constituents: Actions Against Corporations In determining damages, the court's powers are complete to fashion any form of equitable and monetary relief as may be appropriate.
Other Constituents: Actions Business & Corporate Entities: Shareholders & Against Corporations Unlike the more exact process followed in an appraisal action, the ,law does not require certainty in the award of damages where a wrong has been proven and injury established. Responsible estimates that lack mathematical certainty are permssible so long as the court has a basis to make a responsible èstimate of

damages.

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Business & Corporate Entities: Directors & Officers: Duties & Liabilities Business & Corporate Entities: Shareholders & Other Constituents: Actions Against Corporations Delaware law dictates that the scope of recovery for a breach of the duty of loyal ty is not to be determined narrowly. The strict imposition of penal ties under Delaware law is designed to discourage disloyalty.
Business '& Corporate Entities :

Directors & Officers: Duties & Liabilities Once disloyalty has been established the law requires that a fiduciary not profit personally from his conduct.

Business & Corporate Entities: Shareholders & Other Constituents: Actions Against Corporations A successful plaintiff is entitled to interest on money damages as a matter of right from the date liability accrues. In fixing the rate of interest, the court has broad discretion, subject to principles of fairness.
COUNSEL: Ronald A. Brown, Jr., Esquire (argued)., of PRICKETT, JONES, ELLIOTT & KRISTOL, Wilmington, Delaware; Attorneys for Plaintiffs/Petitioners.

Lewis H. Lazarus, Esquire, Michael A. Weidinger, Esquire of MORRIS,JAMS, HITCHENS & WILLIAMS, Wilmington, Delaware; Michael R. Klein, Esquire (argued), Leon B. Greenfield, Esquire, of WILMER, CUTLER & PICKERING, Washington, D.C.; Attorneys for Defendants/Respondent.
JUDGES: Stephen P. Lam, Vice Chancellor

OPINIONBY: Stephen P. Lam
OPINION: MEMORADUM OPINION

LAB, Vice Chancellor
I. INTRODUCTION

This is a consolidated appraisal and breach of fiduciary duty action filed in connection with a March 1993 merger in which the shares of International Telecharge, Inc. ("ITI" or the "Company") were cashed-out for $ 0.30 per share and ÌTI was merged into a corporation wholly-owned by Ronald. (*2) J. Haan, ITI's chairman and CEO. Plaintiffs/petitioners, consisting principally of James D. Azzar and entities owned by Mr. Azzar, owned 2,181,682 shares or 10.8% of ITI 's issued and outstanding shares as of the record date for the Merger. Plaintiffs perfected their appraisal rights in accordance with ~ 262 of the Delaware General Corporation Law ("DGCL").

After taking discovery in the appraisal action, the plaintiffs filed a _ fiduciary duty action against Haan and corporations that he controls, claiming that the Merger was the product of a breach of fiduciary duty. The appraisal and fiduciary duty actions were consolidated for discovery purposes and, later, for trial, which was held on October 19-20, 1998. Post trial briefing was completed and argument heard on July 16, 1999. After receipt of certain additional briefing requested by the court, the matter was submitted.
I now conclude

that the defendants have failed to carry their burden of

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proving the entire fairness of "the Merger and award damages in the amount of $ 1.51 (plus interest) per share against the defendants, jointly and severally. I
do not decide the appraisal action, as it is

unnecessary to do so.

II. BACKGROUND (*3) A. The Parties

ITI was a long-distance telephone company providing live and robotic operator assisted ("0+") telephone services, -primarily through subscribing locations such as hotels, motels and privately owned pay phones. After deregulation of the telecommunications industry and the break-up of AT&T in the mid-1980's, companies such' as ITI recognized the opportunity to entèr thè long distance business in competition with AT&T by offering to pay the owners of subscribing locations or pay phones a commission based onc~ll revenue. The chance to earn phone owners to switch their service these commissions caused many hotel and pay contracts from AT&T (which at first refused to pay commissions), resulting in substantial revenues and profits for the fledgling 0+ companies.
ITI faced competition from other independent 0+ providers, such as Telesphere, Inc. and National Telephone Services, Inc. ("NTS"), a private company acquired by Haan in 1987. Over time, the 0+ market also faced increased competi tionfrom mainstream (" 1 +") telephone service providers, such as AT&T, MCI and Sprint, who developed new business strategies to stem the flow of business to the 0+ market.
Haan became involved (*4) in the 0+ market in 1987 when he purchased a controlling interest in NTS. Seeking to 'achieve a consolidation of companies in that business, Haan approached ITI regarding a possible merger in late-1988 and again about a year later. Both times, ITI' s "reception was lukewarm." Although he realized that competitive pressures would create significant strain for 0+ companies, Haan thought those companies could survive in the long term, if consolidated and properly financed. B.Haan Obtains an Interest in Telesphere

NTS and Telesphere jointly suggested merger discussions with ITI in early 1990. ITI again indicated a preference to stay independent. Shortly thereafter, ijaan sold NTS to Telesphere for a combination of cash, notes and Telesphere stock. When Telesphere/NTS ran into financial diffièulty in January 1991, Haan the sale of 'NTS and, in return, became reinvested a portion of the proceeds from TeIesphere's president and CEO and its largest stockholder. C. Haan Buys the MCI Note and Obtains an Equity Interest in ITI
ITI, like Telesphere, was experiencing severe cash shortages quring 1991 and was in default on a $ 21 million note to MCI. Within days of becoming Telesphere's CEO, Haan(*S) contacted Robert E. Lund, ITI's then CEO, to discuss' a possible merger. ITI continued to show no interest in a merger. Seeing an opportunity to gain influence over ITI, Haan sold Telesphere' s 1+ segment to MCI in exchange for the $ 21 million ITI/MCI note. Telesphere thus became ITI' s largest creditor, with the ability to exercise remedies in default. Holding ~his powerful bargaining chip, Haan approached Lund again and, in March 1991, they agreed on the basic terms of an ITI -Telesphere merger. However, Haan "ran into a disagreement with the board (of Telesphere) and the banks about the merger "and the transaction fell through. Haan resigned from his position at Telesphere. Shortly thereafter, Telesphere was forced into bankruptcy.
Haan perceived that Telesphere' s bankruptcy and ITI' s continued financial distress presented an opportunity for him finally to obtain control of ITL

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ITI needed á cash infusion quickly, and Haan believed the combination of ITI' s
and Telesphere' s customer bases and other operator services assets could result in the economies of scale necessary for ITI to survive. Moreover, reacquiring the ITI/MCI note on favorable terms would significantly ease ITI' s longer

(*6) term financial problems.
Anticipating that Haan would be able to purchase the assets out of the Telesphere bankruptcy estate, Haan and ITI entered a Memorandum of Agreement later amended (the "MOA"), which contemplated that dated October 13, 1991, as . Haan would invest $ 4.0 million to purchase 2,909,091 ITI shares for $ 1.375 per
share. n1 Haan would also

obtain the right to designate a majority of ITI' s

directors. Haan agreed to sell the Telesphere operator service assets and the ITI/MCI note to ITI for substantially the same price he paid. n2 Finally, Haan bargained for a warrant, subject to prior shareholder approval, giving him the

right to purchase enough shares to become ITI' s maj ori ty shareholder.
- - - - - - - - - - - - - Footnotes- -

n1 The original MOA provided for Haan to pay $ 4 million to purchase 8,000,000 ITI shares plus warrants for additional shares to be calculated pursuant to a predetermined formula. The numer of shares sold directly was changed to 2,909,091 and the warrant calculation adjusted accordingly in order net operating loss carry forward belonging to ITI. to preserve a

By purchasing the assets with his own cash and selling assets to ITI in return for a note, Haan actually loaned to ITI the funds needed to make the asset ~urchase.
- - - - - - - - - - - - - -End Footnotes- - - - - - - - - - - - - - - - -

(*7)
ITI engaged the investment banking firm of Oppenheimer & Co. to render an opinion as to the fairness of the transaction. Oppenheimer conducted a valuation of the business and concluded that the equity investment, combined with the other consideration offered, was, taken as a whole, fair to the shareholders of

ITI.

D. The WilTel Agreement and the $ 8 Million Payment to Haan.

Haan learned that Williams Telecommunications, Inc. ("WilTel"), a network services provider, planned to bid on the Telesphere assets, primarily to acquire network services assets that were of no interest to ITI .Haan met with WilTel and, eventually, structured an agreement pursuant to which Haan would bid on all the Telesphere assets, without competition from WilTel, and sell to WilTel the assets it wanted. At some point in the negotiations, Haan and WilTel discussed the mutually beneficial prospect of Haan arranging for ITI to switch its network services provider from ,MCI to WilTel. Thus, ITI might obtain a more favorable network services agreement and WilTel would have a substantial new customer for its network services business. Although not yet formlly an officer or manager of ITI, Haan undertook to negotiate(*8) with WilTel on ITI's behalf.
WilTel agreed to pay $ 5 million for the Telesphere network services

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assets, which is approximately what Haan paid for thém, plus an added $ 8 million to Haan if ITI switched from MCI to WilTel as its network services October 21, 1991 Telesphere bankruptcy hearing, Haan testified provider. At the about the transaction with WilTel, stating, "I am agreeing to sell the one plus base and network assets to (WilTel) for $ 5 million. And then I am also arranging for (WilTel) to get the additional traffic generated by ITI in payment to me (of) $ 8 million." ITI representatives were present at this hearing but unable to hear Haan' s testimony.

million payment he expected to receive from WilTel for securing ITI' s

Haan became an ITI director and board chairman on October 24,1991. At a November 12 meeting, the board elected him CEO, with Lund staying on as president. At that same meeting, Haan presented the proposed ITI-WilTel network services agreement that had been negotiated on behalf of IT! by Haan and his persqnal counsel. In making that presentation, Haan did not disclose the $ 8

participation in that agreement. Unaware of Haan'sinterest, the(*9) Board approved the agreement. Wil Tel made good on its promise and paid Haan $ 8

million.

E. ITI's Special Committee Declines to Take Action Against Haan Several months later, the Board became aware of the $ 8 million payment to
Haan. Conce~ned about the legality of that payment, the Board appointed

a

special review committee comprised of the ITI directors other than Haan. Wilmer, Cutler & Pickering, later hired to represent Haan and the other defendants in these actions, were retained as legal counsel to the special review committee.

The special rèview committee's report (the "Report"), dated June 15, 1992, concludes that Haan probably owed fiduciar~ duties to ITI beginning on October' 13, 1991, when he signed the MOA. According to the Report, "Haan' s shareholdings (which were greater than the holdings of any other shareholder or shareholder group), his right to name a majority of the Board, and his actual control of ITI gave him a controlling position." (emphasis added). The Report also acknowledges that Haan clearly owed fiduciary duties at the November 12 board meeting, when

he was ITI' s board chairman and CEO and presented the proposed ITI-WilTel
agreement to the board of(*10) directors.

were faír to ITI and that Haan energetically advanced ITI' s interests.

After discussing Haan' s duties of loyalty and the conflict of interest raised by the $ 8 million payment, the Report states that the ITI-WilTel Agreements
Consequently, the Report finds no harm to ITI as a result of Haan' s accepting the $ 8 million payment.

The Report identifies various instances of insufficient disclosure by Haan of his agreement with WilTel. However, upon finding that Haan did not seek to information and that it was not unreasonable for Haan to assume the conceal the board knew of the particulars of his deal with WilTel as disclosed by him in bankruptcy court, the Report concludes that this was not a clear violation of Haan' 5 duties to ITI. However, because "the Board was not aware of all material 'it approved (the facts concerning the terms of the Haan-WilTel Agreement when ITI-Haan and ITI-WilTel agreements), the Board's approval of those agreements was arguably ineffective under section 144 (a) (1) of the Delaware Code." Although Haan "showed a lack of sensitivity to actual and apparent conflicts of interest and to his disclosure obligations as a corporate fiduciary... ITI was not (*11)adversely affected by WilTel's payment to Haan". Thus, the Report

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recommends that the ITI Board ratify the ITI -Haan and ITI -Wil Tel agreements. The ITI directors (Haan abstaining) did so on June 19, 1992.

F. ITI Obtains Interim Financing from PNB

provided ITI with interim financing relief by buying out ITI' s existing source
of receivables financing and providing more favorable terms to the Company.

Like many businesses, ITI needed a satisfactory, long-term accounts receivable financing source to ensure predictable cash flow. In September 1991, & Co to search prior to Haan' s investment, ITI hired the consulting firm of Kane for a financing solution. After becoming -the Company's chairman and CEO, Haan

Kane identified Bell Atlantic TriGon Leasing Corp. as a potential financing source. Unlike many bank lenders, who did not undeFstand the nature of ITI's business and receivables, Bell Atlantic was experienced and knowledgeable in the industry. Also, Bell Atlantic knew the 0* market segment and knew Haan because it had provided receivables financing to NTS while Haan was involved with that

corporation. '
from the Pittsburgh

Before discussions with Bell Atlantic matured, Thomas Hyatt, ITI' s Chief Financial (*12) Officer fired Kane to save money. Although Hyatt told Kane financing elsewhere," this statement was that ITI had "obtained receivables untrue at that time. About a month after firing Kane, ITI obtained a 90-day loan

National Bank ("PNBtl), guaranteed by Haan, made in

contemplation of entering into a long-term relationship.

G. PNB Declines to Provi~e Long-Term Financing
On April 10, 1992. PNB sent a letter to Hyatt refusing to continue its ~nvolvernent with ITI, explaining that ITI had not been responsive or cooperative in PNB' s efforts to structure longer term financing. Hyatt testified that PNB' s reluctance to continue its relationship with ITI was due entirely to PNB' s fear that if ITI filed for bankruptcy, its creditors would sue PNB under certain Although the PNB line was set to expire on April 22, lender liability theories. 1992, PNB agreed to extend the term until June 24, 1992. Haan extended his

guarantee as well.

At the end of March, realizing that PNB would not become ITI' s longterm financing source, Hyatt renewed contacts with Bell Atlantic, sending to it a package of financial information and copies of the PNB loans to Bell Atlantic. He did not recontact (*13) Kane at this time.

H. ITI Misses its Projections

When the actual first quarter results became available, Hyatt saw that ITI was not meeting its financial projections. Revenues were significantly short of expectations, and expenses were ,higher. On May 12 and 13, Hyatt met with Haan and others to discuss the poor results-. According to Hyatt, this "was a wake-up meeting" for Haan. Haan then took a more active role in the Company's daily management and, implemented drastic cost-cutting measures. The poor financial results also caused ITI to go into technical default on its longterm debt. -Thus, both to obtain a dependable source of receivables financing and a ITI needed rearrangement or restructuring of its long-term debt.
I. Bell Atlantic Sends a Term Shèet

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The deteriorating financial picture complicated ITI' s efforts to secure a source of financing to replace PNB. On May 14, 1992, Hyatt and Haan met with Jay Silverstein of Bell Atlantic to discuss ITI' s need for Alexander Cole and receivables financing. During the meeting, Hyatt asked for $ 40-45 million in financing. Cole and Silverstein stated that Bell Atlantic contemplated a loan in the $ 20 million range. ITI's expedited schedule(*14) (necessitated by the June 24 expiry of the PNB loan), as well as the need for credit support in the form of a guarantee from Haan, were concerns for Bell Atlantic. At the meeting, Haan stated that he would not guarantee the loan.
Later that day, Bell Atlantic sent a new proposed term sheet to Haan' s attention. This term sheet proposed a three-year secured $ 40 million credit line. The term sheet also called for Haan' s guarantee of the loan, collateralized by a $ 5 million certificate of deposit and proposed that all debt due Haan by ITI be subordinated to Bell Atlantic's secured credit line. Finally, the term sheet called for a restructuring of ITI' s other liabilities in a fashion acceptable to Bell Atlantic. Haan never disclosed the existence of this term sheet to the board of directors and may never even have shown it to

Eyatt.
J. The Board Meets on

May 18

1. Informing the Board of ITI' s Troubles
ITI's directors met on the morning of May 18, 1992. Hyatt r~ported on the state of the Company's finances, including its search for receivables financing. Hyatt's report, discussing the Company's iminent bankruptcy risk, indicated that the Company's revenues and profits had (* 15) not improved in line with expectations from late 1991. He also discussed the May 14 meeting with Bell ,likelihood that Bell Atlantic would provide Atlantic and reported the low financing. According to the minutes of the meeting, Hyatt indicated "that Bell Atlantic had expressed some limited interest in providing receivables financing but were not willing to commit to the maximum amount the Company needs. They are looking to find a partner to join with them in providing financing, but will probably not be able to meet the June 24 date."

It appears that Hyatt either was unaware of the terms of the $ 40 million line of credit proposed by Bell Atlantic to Haan after the May 14 meeting or chose not to discuss those terms with the Board. In either case, Hyatt's "report was fairly grim." Without a plan to replace the PNB facility by the time it expired in late June, the directors concluded that ITI faced the very real possibili ty of a Chapter 11 bankruptcy filing.
2. The Board's Response: Creating a Special Committee to Find a Source of Financing or Otherwise Save the Company

At this same meeting, Haan suggested that he might make a proposal to provide financing or to purchase(*16) ITI's assets. He did not discuss details.
The ITI directors recognized that Haan' s position (significant creditor, large stockholder, CEO and Chairman) and his interest in making a further proposal to the Company required that he not participate in the Board's pursuit 'May 18 meeting to of alternative strategies. Thus, the directors voted at the establish a committee consisting of the three Board members other than Haan

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(the "Special Commttee") and charged that committee with the task of searching for alternative sources of financing or alternative transactions for ITI. The
Special Committee was directed to investigate and make decisions on potential options, including, but not

limited to:

all

* a sale of assets;

* a new source of financing;

* an investment or equity infusion; and, failing all else
* a voluntary bankruptcy filing.

The Special Committee was given the power to retain professionals and experts to assist in its work. Lund was named chairman. The Board instructed Hyatt to assist in all aspects of the Committee's work.

Board's understanding that a bankruptcy filing (*17) would destroy the

The committee's goal of finding. any al ternati ve to bankruptcy was due to the

Company and result in no recovery for the common stockholders or the unsecured credi tors. In the event of a bankruptcy filing, ITI' s customers (pay phone owners, hotel owners and others) could easily and quickly switch to another 0+ service provider, severely affecting ITI' s revenues and profits. Hyatt likened ITI's business to an ice cream cone, opining that if ITI filed a voluntary bankruptcy petition, it "would just melt. Thère wQuld be nothing left."
Indeed, the perception at the time was that a bankruptcy filing would prove disastrous for all involved. Not only would the stockholders and unsecured creditors get nothing, but the secured creditors would recoup "certainly less than $ 0.10 on the dollar" out ,of a Chapter 11 proceeding. K. Haan Contacts Bell Atlantic Without the Special Committee's Knowledge

Hours after the May 18 board meeting, Haan (without Hyatt) telephoned Cole and Silverstein of Bell Atlantic, after which he faxed to them a letter typed on ITI letterhead and signed by him in his capacity as CEO. This letter, reasonably interpreted by Bell Atlantiè as ITI' s "response and counterproposal for the terms and conditions of the (May 14) (*18) proposal," proposed financing terms that were markedly different from Bell Atlantic's May 14 term sheet as

follows:

* The borrower would be ITI or any successor. to ITls interests or

* assets;
* The counterproposal contemplated a 20 million facility;

* Haan would guarantee the full amount of the facility; * Closing on September 15, 1992, as opposed to August 15, 1992.

"counter-proposal" set out terms materially inconsistent with ITI' s ,needs.
Although the board earlier that day agreed that a $ 20-25 million facility would not suffice, Haan requested only $ 20 million. Despite the impending

Besides differing from Bell Atlantic's May 14 term sheet, Haan' s

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termnation of the PNB loan,' Haan' s request moved the closing date back by 30 the board that he would not guarantee the facility but then proposed to Bell Atlantic to do just that.

This contact between Haan and Bell Atlantic is centrally important to plaintiffs' case for two reasons. First, the Special Commttee never learned about it. Second, Haan' s conduct interfered with whatever opportunity ITI had to obtain financing from Bell Atlantic.
Lund testified at trial that the(*19) Special Committee expected Hyatt to continue efforts to obtain financing from Bell Atlantic. Although Hyatt claimed at trial that he stayed "in touch" with Bell Atlantic after May 18 and reported those contacts to the Special Committee, his testimony is not supported by the evidence. To start with, the minutes of the June 3, 1992 meating show Hyatt telling the Special Commttee that Bell Atlantic's position was unchanged from that reported by him on May 18. The minutes reflect no mention of either the May 14 Bell Atlantic term sheet or Haan' s May 18 "counterproposal." How could Hyatt have been in contact with Bell Atlantic without learning about those things?

At his deposition, Hyatt was unable to recall any contacts with Bell Atlantic after May 18. He still had no recollection about this at trial. The best he could do was to state that because the minutes of the June 3 board meeting report him saying that he contacted Bell Atlantic between May 18 and June 3, he must have done so. While there is no reason to doubt the accuracy of the minutes in reporting what Hyatt said at the June 3 meeting, those minutes are not evidence of the truthfulness of Hyatt' s report. Moreover, neither ITI (~20) nor Bell Atlantic produced any documentation evidencing any contact between Hyatt and Bell Atlantic after May 14. n3 Finally, there is no evidence that any memer of the Special Committee otherwise knew about Haan' s contacts with Bell Atlantic. Instead, the evidence is that the members of that commi ttee believed that Hyatt failed to make progress because Bell Atlantic was not willing to providè financing on terms that were possible for ITI to meet.
- - - - - - - - - - - - - - -Footnotes- - - - - - - - - - - - - - - - - n~ Defendants argue that a June 8 letter to Bell Atlantic from Oberdorfer, one of Hyatt's subordinates, that included financial projections for Haan' s proposed new entity, proves that Hyatt must have known about Haan's activities. I disagree. Hyatt's only testimony about the letter is that he must have received it because he saw the "cc" addressed to him. However, the letter was produced by Bell Atlantic and not ITI. In any case, whether Hyatt saw the letter or not, the evidence is clear that Hyatt never told any memer of the Special Committee about Haan's contacts with Bell Atlantic.

- - - - - - - - -End Footnotes- - - - - - - - - - - - - -

(*21)
L. Haan Proposes the Services Agreement

At the June 3, 1992 board of directors meeting, Haan proposed the framework for a sales, accounting and management services agreement, which eventually became known as the Services Agreement. Haan suggesting setting up an entity (named ONCOR) wholly-owned by Haan that would, acting as ITI' s customer interface, manage most òrall of ITI' s operating assets, obtain new financing

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50% of its revenues to ITI. was to find a means

for renegotiating and reducing ITI' s long term debt. A related goal of the Services Agreement was to protect ITI' s customer base from the "meltdown" which was feared in the event of a bankruptcy filing. By isolating the customer

contacts in a separate corporation, ITI' s business operations could survive in
the shelter of ONCOR and the Services Agreement even if ITI was forced to file for bankruptcy.
'At the June 19, 1992 Board meeting, the directors, after discussing certain efforts to find financing or an acquisition candidate, concluded that "no other parties had shown any interest in acquiring the Company or financing (*22) its accounts receivable outside of Chapter 11." Haan then explained the structural details of the proposed Services Agreemant. After further negotiation and document preparation, the board entered into the Services Agreement on June
28, 1992.

not have

Lund testified that if ITI had received the Bell Atlantic financing, it would needed the Services Agreement. Further, Hyatt testified that with the Bell Atlantic financing, the Company would have avoided bankruptcy, at least for the time being. Hyatt also stated that if the Company had received the needed financing, it is reasonable to belíeve that it would have succeeded in restructuring its long-term debt.
M. The Company Accepts the Merger Offer

The minutes of the June 3 board meeting reflect that Lund, in outlining Haan's proposal for the Services Agreement, told the board that "Ron Haan would set up another corporation and this corporation would agree to buy the shares of ITI stock from the ITI stockholders at a price to be agreed upon with ITI. Mr. Haan indicated that he would propose to offer (30 cents) n4 per share as the purchase price of the ITI stock which he believed to be fair under the

circumstances. "
_ _ _ _ _ - - - - - - - - Footnotes-

n4 The minutes actually say "0.30 cents ($ .03)" but it is clear from the context that naan actually proposed to pay 30 cents ($ 0.30) at this meeting. _ _ _ _ _ _ _ _ _ - - - - - - - -End Footnotes- - - - - - - - - - - - - - - - ( *23)

Although the evidence is contradictory, I believe it more likely that the Special Committee or its members, and not Haan, originated the idea of proposing a cash-out merger at the same time as the Services Agreement. Haan has consistently said that the other directors raised the idea with him. At thei~ depositions, each of the Special Commttee members contradicted this testimony, idea of a merger. At trial, however; Hyatt stating that Haan first raised the and Lund testified that the Special Commttee insisted on the Merger when those directors realized that the Services Agreement so fundamentally altered the nature of ITI' s business that the shareholders should be given the chance to "opt out." Defendants explain. the inconsistent deposition testimony as the result of the witnesses confusing the Services Agreement and the Merger. This explanation is plausible,

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Regardless of who suggested the Merger, the proposal for a cash-out merger was formally presented on June 3, 1992 and the $ 0.30 per share price established at that time. On July 23, 1992, the board executed a merger agreement among ITI, Long Distance Communications, Inc., a company wholly-owned by Haan, and its subsidiary, (*24) LDC Acquisition, Inc. That agreement was finally presented to thè stockholders for their approval on March 23, 1993. SometÍIe before the June 3 meeting, the Special Committee hired Stroock & Stroock & Lavan act as its outside counsel and Hale, Spencer, Stanley, Pronske were present in person or by telephone at that meeting. The Special Committee also retained Kane to provide a fairness opinion on the Merger.
The proxy statement disseminated to ITI' s shareholders indicates that Lund and Richardson "had several discussions with Haan concerning the price that Haan would be willing to pay" to buyout the minority shareholders. The depth and nature of these discussions is in doubt. While the depositions of Thomas, the depositions and Richardson and Kane indicate that negotiations were minimal, trial testimony of Lund and Hyatt suggest there were more substantial

& Trust; P. C. to advise on bankruptcy issues. Representatives of both law firms

negotiations.

When asked how the merger price was set, Thomas indicated that the offer price "was roughly where the shares were trading at the time. May have even been above. But it was - the specific numer was probably contained in the proposal

(*25) from Haan." Asked whether he knew how Haan came up with the Merger
price, Thomas stated, "If there was a calculation, I don't remember that . From my view it was a numer which reflected where the shares were trading in the market,_ so it was in the ballpark."

Although the proxy statement reported that Richardson was involved in "discussions" regarding the merger price, Richardson indicated that he was
. . . involved in negotiation, only in a, you know, limited sense because there wasn't extraordinary negotiations. Mr. Haan told us what he would do, what he was willing to do, and that seemed to be, you know, generally, the only alternative, the only viable alternative we felt we had rather than a

bankruptcy.
Richardson stated that Hyatt, Lund and Elliot (the Company's in-house counsel) tried to get the best deal possible for the Company. However, he explained that

since "there didn't seem to be a viable alternative, the negotiations. were
Lund and Hyatt paint a somewhat different picture of the Merger negotiations. Lund, who(*2G) was primarily responsible for negotiating with Haan, testified at trial that "there was a price of 25 - at one point in time Mr. Haan offered us a price of $ .25 a share and we were, through contingent to the adequacy of negotiations, able to reach agreement on $ .30 a share." As

not held in what you might call a manner where you had two people who
didn't have to do a deal or could do it or could not do it."

the $ 0.30 per share price, Lund said that
any price above a bankruptcy price' was a fair price. I don't know if it was fair to the shareholders. I mean, the point is, I don't know what would have been fair to the shareholders. The fact that the company did not go into Chapter 11

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and was the place we found ourselves in 1991 and 1992 - and in my opinion still amazes me - and we would get a pal try sum of $ 0.30 a share for the shareholders, I would say, a yeoman's effort. Let's put it this way. I' mnot saying it personally. I'm saying it was ,a very good price considering the

situat,ion.

Hyatt stated that the "negotiations were intense. My recollection is, Ron came in with an initial offering that was pretty low because of the financial status of the company, and eventually, as I recall it, it was $ .30 is where it

ended up in terms of the offering." "
Neither party presented any documentary evidence(*27l of these negotiations. Taken as a whole, the record indicates that, due to ITI' s weak bargaining position, negotiations were minimal.
N. Haan' s Contacts with Bell Atlantic Evidence Bad Faith

Based on the entirety of the record, I find that Haan' s contacts with Bell Atlantic were intended to divert the opportunity to secure financing from Bell Atlantic away from ITI at the moment ITI most needed it. Based on his trial testimony and the other evidence in the record, I find that Haan fully, understood the impropriety of his conduct and affirmatively tried to conceal it from both the Special Committee and the plaintiffs in these actions.

Haan's secretive contacts with Bell Atlantic served no purpose other than to di vert Bell Atlantic's attention away from ITI. After he sent the May 18 counterproposal requesting financing for ITI or any successor in interest to ITI's assets, Haan continued contacts with Bell Atlantic until after the Serviceß Agreement was approved. On June 12, 1992, Haan conducted a telephone conference with Cole and Silverstein. Silverstein's notes of that èonference indicate that Haan preferred a $ 15 million line of credit and instructed Bell Atlantic to revise its (*28) proposal letter. On June 29, Bell Atlantic sent COR , reflecting, the substance of these conferences. Haan then a proposal to ON abandoned the Bell Atlantic negotiations until after the Merger was completed. At trial, Haan testified that he wanted to obtain Bell Atlantic's commitment as a "backup" to support his financing of ONCOR, purportedly to show the Special Committee that he could fund ONCOR' s requirements under the Services Agreement. This is not credible for the simple reason that Haan never told the board of directors about his contacts with Bell Atlantic, and never disclosed Bell Atlantic's proposal to fund ONCOR. ,I conclude, instead, that Haan purposefully diverted Bell Atlantic from considering the financing required by ITI and then avoided raising suspicion by waiting until after the Merger was approved before

signing a deal with Bell Atlantic.

Finally, my review of'the record and observations at trial lead to the conclusion that Haan understood the wrongfulness of his actions and attempted to conceal them, first from his fellow directors, then from ITI' s shareholders and later from the plaintiffs in this case. At the June 3, 1992 board of directors meeting, Haan was present (*29) when Hyatt made his report about Bell Atlantic but failed to disclose his own contacts with Bell Atlantic. Haan also did not, at any later time, inform the board of those contacts. Nor did Haan cause the proxy statement distributed to the ITI stockholders in connection with the Merger to mention Haan's contacts with Bell Atlantic. Finally, neither Haan nor the Company produced any written evidence of Haan's 1992 contacts with

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Bell Atlantic in the course of discovery in these actions. Instead, the plaintiffs only learned of those contacts by serving a subpoena on Bell Atlantic. In my judgment, these facts justify the conclusion that the omission of all such documentation from the production made by Haan and ITI in these litigations was either intentional or a consequence of Haan' s earlier efforts to conceal these contacts. n5
O. The Company Restructures its Debt
After the Services Agreement took effect on July 1, 1992, ITI' s financial position improved. The Services Agreement; along with ITI' s improved performance, gave ITI the leverage necessary to reach a restructuring agreement wi th its long-term creditors. According to Hyatt. the Services Agreement "became
the hamer that we (*30) used on the creditors to renegotiate the

debt

because we had a solid firm, if you will, cash flow that we could predict to them, and we knew exactly what the cash would be."
_, _ _ _ _ _ _ _ - - - - - - - - - -Footnotes- - - - - - -

n5 I also read portions of Haan' s original deposition, taken before plaintiffs obtained the documents from Bell Atlantic, as intended to downplay the nature and extent of his contacts with Bell Atlantic during the relevant time period, presumably to divert further inquiry into Beii Atlantic's role.

_ _ _ _ _ _ - - - - - - - - - - -End Footnotes- - - - - - - - - - - - - - - - -

Immediately prior to the Services Agreement, ITI' s outstanding debt was approximately $ 90.5 million. In November 1992, the Company achieved its goal of with RHVI (Haan' s wholly owned restructuring its largest debt obligations lending subsidiary), Northern Telecom and WilTel. NorTel insisted that Haan other creditors. WilTel also made restructure his ITI debt proportionally with its participation in the restructuring contingent on the participation of other

credi tors. Haan initially thought that he would not have to restructurè his debt
agreed to restructure his debt too, but he bargained for the right to' terminate
(*31) he viewed his agreement to pay $ 5 million to the Company's shareholders in the Merger as providing some benefit to ITI. Eventually, he

because

participation in the debt restructuring in the event the Merger did not his become effective. He did this because he believed that, as long as he became the Company's 100% owner through the Merger, he could recaptu~e any debt forgiven by him in the form of greater profits, "on the back end."
Because the agreements of the creditors to participate in the debt restructuring were mutually dependent and Haan' s depended, in this way, on the accomplishment of the Merger, the entire debt restructuring was technically contingent on the approval of that transaction. Nevertheless, the debt restructuring became effective in November 1992, subject to being unwound. Moreover, Haan' s right to termnate his participation in the restructuring thus, unwind the whole thing) was not easily or speedily agreement (and, exercised. Instead, ITI secured Haan' s agreement requiring him to give four month's notice of termnation before any right to withdraw came into play. Thus, even if the Merger(*32) had not occurred, ITI had some ability to find alternative sources of financing or otherwise to stave off the need to file for

bankruptcy protection.

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In connection with the November 1992 debt restructuring, Haan also sought to protect himself from the possibility of suit over the $ 8 million WilTel payment. ITI needed to secure Haan' s agreement (like that of other secured creditors) to forebear from exercising his rights in default under debt owed by ITI until the vote on the Merger. Haan conditioned his forbearance on the Company's agreement not to bring any action arising out of the transactions that were the subject of the Special Committee Report, if that claim resulted in a final judgment or settlement exceeding $ 250,000.

With the debt restructuring in place, ITI, despite its financial distress during the spring, realized nearly $ 3 million of net income for the year 1992.
P. The Proxy Statement

A proxy statement dated February 10, 1993 was disseminated to ITI' s
stockholders in connection with a stockholder vote on the Merger, originally scheduled for March 29, 1993. The proxy statement indicated that if there were insufficient votes at the meeting to approve the Merger, (*33) the meeting might be adjourned to permit further solicitation of proxies by the Company.
The proxy .statement explained the directors' conclusion and recommendation as to the fairness of the merger price, as follows:

As set forth in the Company's Consolidated Financial Statements, the Company had a shareholders' deficit of $ 40.9 million at December 31, 1991. Prior to the consumation of the debt restructures described below, the Company had been in payment default on substantially all of its long-term debt, network services . . 1990 .
agreements and capital lease obligations during various periods since

. The Company's most recent accounts receivable facility was scheduled to expire on June 24, 1992 (and ultimately expired on July 16, 1992) i and the bank lender in that facility indicated its unwillingness to extend the facility. The Company and its financial advisors were, unable at such time to obtain substitute accounts receivable or equity fìnancing or any proposal to acquire the Company from any third party, other than a proposal from Haan to provide management services and financing through a services agreement with ONCOR. . . . The Board. . . reviewed this proposal as(*34) well as the possibility of a voluntary bankruptcy filing, which the Company believed was the only other alternative available to it. Without the cash flow provided by the services agreement in lieu of an accounts receivable facility, the Company would lack sufficient liquidity to meet its payroll and other debt obligations, notwithstanding its recent operating results. The Board.. . obtained the commitment that another corporation wholly owned by Haan would provide the opportunity to the Company's stockholders to receive the Merger Consideration for their shares of Company CornonStock pursuant to the Merger . (emphasis added).
The proxy explained the discussions with Bell Atlantic as follows:

In discussions with the Company's management during early Spring 1992, one potential lender initially expressed preliminary interest in providing new to provide the
accounts receivable financing but was not willing by itself needed a partner to join with it to provide such

amount of such financing required by the Company, Such lender indicated that it financing and that such financing could not be in place before the June 24th expiration date. In addition, such lender indicated that (*35) it would require Haan to pledge,

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at a ~inimum, a $ 5.0 million certificate of deposit, which Haan indicated that he was unwilling to provide.
Consequently, in late May 1992, with the expiration of the Company's accounts receivable financing approaching, the Board authorized and directed the company's management to investigate and make recommendations for Board action on all potential al ternati ves available to the Company. . . . In the ensuing weeks, certain members of the Board an4 the Company's management, as well as the Board's financial advisor, contacted numerous third parties to determine whether such third parties would be interested in providing an equity infusion any of to, or purchasing all or part of the assets of, the Company. . . . In addition, the Company's management continued to seek a lender to provide accounts receivable financing. . . None of the entities contacted was willing to finance the Company unless and until the Company improved its financial condition.

Q. The Initial Shareholder Meeting is Adjourned
At the board meeting on March 29, 1993, Haan proposed "that if the required
majority vote of outstanding shares of ITI stock is not voted in

favor (*36)

(of) the Agreement and Plan of Merger at the Special Stockholders meeting on, March 29, 1993 that such meeting be rescheduled to be held on March 31, 1993."

At the shareholder meeting later that day, an insufficient numer of ITI shares were voted in favor of the Merger. Before the vote could be finalized, however, the meeting was adjourned and rescheduled for March 31, 1993. Over the next two days, the Company solicited additional proxies so that on March 31, 1993, the Merger was approved by the affirmative vote of 51.91% of ITI's outstanding shares, including the shares owned by Haan.
III. DISCUSSION

The plaintiffs' claim, at its core, is that (1) Haan's subversion of ITI's negotiations with Bell Atlantic in May-June 1992 and (2) Haan' s failure to disclose those actions to the board, constitute breaches of his duty of loyalty that resulted in and ineradicably tainted the Services Agreement, the debt restructuring and the Merger. As a remedy, plaintiffs seek rescissory damages equal to the fair value of their ITI shares. Plaintiffs also urge the Court to exercise its authority to order disgorgement of Haan' s approximately $ 60 million of post-merger profits. Fina,lly, the plaintiffs(*37) seek disgorgement of the $ 8 million paid by WilTel to Haan in consideration of Haan causing ITI to enter into a network services agreement with Wil Tel.

Haan argues that the Company was failing and that his actions - even if disloyal - caused no harm because shareholders would have received nothing in bankruptcy. While it is reasonable to conclude that the ITI common equity would have been worthless in a Chapter 11 proceeding, the record shows that the Company's iminent bankruptcy risk would have passed if ITI secured a new SQurce of accounts reèeivable financing. Moreover, Hyatt testified that receivables financing would make it possible for ITI to restructure its long-term debt. No doubt, as the terms of the proposed Beii Atlantic refinancing suggested and events proved, these steps would have been interdependent and difficult to accomplish. But the record does not support Haan' s suggestion that they were impossible or that the ITI equity was (as a consequence) worthless.
It cannot be judged how likely it is that alternative financing could have

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been obtained or would have resulted in a debt restructuring and return to profitability. Haan's actions make it impossible to know what(*38) would have happened if he had acted in accordance with his fiduciary duties instead of his personal economic interests. What can be said ls that Bell Atlantic presented some financing opportunity for ITI. For this reason and the reasons in greater detail below, I find that Haan breached his fiduciary duty discussed of loyalty to the shareho~ders of ITI. A. The Court Will First Resolve the

Fidudary Claims
The Supreme Court made clear in Cede & Co. v. Technicolor, Inc. that, in trying this consolidated fraud and appraisal action, the Chancery Court should first evaluate the -fraud claims. DeL. Supr., 542 A.2d 1182, 1191 (1988) ("Cede I"). The Court will determine whether the Merger was entirely fair to ITI' s shareholders. If I conclude that it was entirely fair, the plaintiffs' statutory appraisal remedy will be the sole means of establishing a fair value for the shares of the di'ssenters. Id. If the Merger was not entirely fair, in contrast, other forms of equitable relief are available. For example, the "Court of Chancery may incorporate elements of rescissory damages into its determination of fair price if it considers such elements: ,( 1) susceptible to proof; and

Inc., DeL. Supr., 634 A.2d 345, 371 (1993) ("Cede II") i In re Tri-Star Pi,ctures,
Inc., Litig., Del. Supr., 634 A.2d 319, 333 (1993); accord Weinberger v. UOP, Inc., Dei. Supr., 457 A.2d 701, 714 (1983). The inquiry is structured so that regardless of the Court's substantive findings, the plaintiffs are limited to, and statutorily assured of, a single recovery. Cede I, 542 A.2d at 1191.
B. The Entire Fairness Standard Applies
It is obvious to me that the entire fairness standaEd governs' the Court's review of this matter. Plaintiffs' claim that this standard controls because Haan, though not a majority shareholder, was ITI's controlling shareholder. See, e.g., Tri-Star, 634 A.2d at 328. Defendants claim that Haan did not control ITI, and therefore, that the business judgment standard of review should apply. See,

(*39) (2) appropriate under the circumtances." Cede & Co. v. Technicolor,

e.g., Aronson v. Lewis, Del. Supr. 473 A.2d 805, 816 (1984) i pogostin v. Rice,

Del. Supr., 480 A.2d 619, 624 (1984). I find that whether Haan controlled ITI, either by his shareholdings or through(*40) other means of influence, is not material to a finding that the entire fairness is the proper standarq for this Court to review the alleged wrongdoing. n6

_ _ _ _ _ _ _ - - - - - - - -Footnotes- - - - - - - - - - - - -

n6 Although establishing that Haan is a controlling shareholder is not necessary in this case, I note certain facts which color tha relationship between Haan and the other directors.
The -Report regarding the Haan-WilTel agreements indicate that, even befor~ he became ITI' s CEO, chairman and president, "Haan' s shareholdings, his right to name a majority of the Board, and his actual control of ITI gave him a controlling position." (emphasis added).

Whether Lund, Richardson and/or Thomas were "beholden" to Haan or that they were "so under (Haan' s) influence that their discretion would be sterilized," Rales v. Blasband, Del. Supr., 634 A.2d 927, 936 (1993), is a matter of considerable dispnte. Much of the plaintiffs' arguments focus on the

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compensation to these directors, which was paid at Haan's behest. See, e.g., In

re MAXA, Del. Ch., 659 A.2d 760, 774 (1985); Rales, 634 A.2d 927.

Thomas, who had been with ITT since 1988, was party to a consulting agreement

with ITT ,by which he was paid approximately $ 6,000 per month during 1992,
representing 20-25% of his annual income at that time. The defendants state thàt due to Thomas' relationship with, another company, he had decided that "as soon as (he) had fulfilled (his) job as a board member, (he) needed to no lònger consult for ITT." Defendants claim that because Thomas wanted to terminate the consulting re1ationship, any doubt created by the consulting agreement should not be considered by the Court.
Richardson, a founding director of ITT, was party to a consulting agreement with ITT which would pay him $ 125 per hour for time spent in his consulting duties. However, Richardson was paid about $ 5,000 under this temporary arrangement, representing a small portion of Richardson' s wealth, including over 174,000 ITT shares that he owned directly or through a corporation of which he was the majority owner.
On January, 7, 1992, the board approved a new employment contract for Lund, which he negotiated with Haan as ITI' s representative, and which included the continuation of Lund's salary of between $ 250,000 and $ 300,000 during the remainder of 1992 as well as various bonuses to Lund. The $ 250,000 paid to Lund during 1992 represented over half of his income for that year. Whether this amount differs from his rights under his original employment contract is in

dispute.

Finally, although Hyatt was the Company's CFO and not a director, it is worth noting that several months prior to the trial, Haan re-hired Hyatt at a salary of approximately $ 250,000 per year. This fact'- combined with others that are mentioned elsewhere in this opinion, lead me to, question the reliability of Hyatt's trial testimony.

_ _ _ _ - - - - - -End Footnotes- - - - - - - - - - - - - - - - -

(*41 )
Even where it initially applies, the business judgment rule is rebutted if there is evidence of disloyalty, including, for example, "the motives of entrenchment, fraud upon the corporation or the board, abdication of directorial duty or the sale of one's vote." Cede II 634 A.2d at 363 (citations omitted). Naturally, the Court's "reluctance to assess the merits of a business decision ends in the face of illicit manipulation of aboard's deliberative processes by self-interested corporate fiduciaries." Mills Acquisition Co. v. MacMillan, Inc., Del. Supr., 559 A.2d 1261, 1279 (1989). Put simply, if the Court finds facts evidencing disloyalty by the defendant, the business judgment rule is rebutted, and the Court reviews the transaction to determine whether, despite disloyal act, the transaction is nevertheless entirely fair to the Company's the shareholders. Cede II at 371 (citing Smith v. Van Gorkom, Del. Supr., 488 A.2d

858 (1985)).

These acts interfered with the other directors' efforts to benefit ITI' s
shareholders. Haan's disloyal acts are as follows: (*42)

The evidence shows that Haan commtted several acts of disloyalty to ITI.

* At the May 18, 1992 board meeting, the Special Committee was created for the

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purpose of finding financing for ITI from, among others, Bell Atlantic. The nature of the financing needed was thoroughly discussed. Haan breached his duty of loyalty by contacting Bell Atlantic immediately afterward with a

counterproposal that was - though printed on ITI letterhead - adverse to ITI' s
financial interests. Even if Bell Atlantic had immediately signed Haan' s counteroffer, ITI would still have needed financing.

* Haan states that his contacts with Bell Atlantic were intended to find financing for ONCOR, integral to the Services Agreement he later proposed. Haan not, consistent with his fiduciary duties, contact Bell Atlantic to obtain ,could financing for ONCOR without first obtaining the board's permission to do so. See generally, Guth v. Loft, Inc., Del. Supr., 23 Del. Ch. 255, 5 A.2d 503 (1939); Yiannatsis v. Stephanis by Sterianou, DeL. Supr.,_ 653 A.2d 275 (1995).
* It is clear the Special Committee, proceeded unaware either of the May 14 Bell Atlantic term sheet or of Haan' slater contàcts with Bell Atlantic. Haan' s

several failures (*43) to inform the board of these matters constitutes
separately cognizable wrongs.
Finding evidence of a breach of the duty of loyalty sufficient

to rebut

application of the business judgment rule, I will review the transaction under the entire fairness standard of review, as required by Cede II
C. Haan Bears the Burden of Proving the Entire Fairness of the Transaction

When the entire fairness test applies, the burden of persuasion initially lies with the defendant. See Kahn v. Tremont Corp., Del. Supr., 694 A.2d 422, 428 (1997); Weinberger, 457 A.2d at 710; Rosenblatt v. Getty Oil Co., Del. Supr., 493 A.2d 929, 937 (1985). The burden of proof "may be shifted from the defendants to the plaintiff through the use of a well functioning committee of

independent directors. ,,' Tremont, 694 A.2d at 428; Kahn v. Lynch Communication
Sys., Del. Supr., 638 A.2d 1110,1117 (1994).
In this case, the burden 'remains with Haan and the corporate defendants (even assuming that Thomas, Richardson and Lund were truly independent of Haan) because Haan' s misconduct interfered with or corrupted the proper functioning (*44)of the Special Committee. In Rabkin v. Olin Corp., then Vice Chancellor Chandler explained the two part test for determining whether the -burden of proof should be shifted because of the presence of an independent committee:

The mere existence of an independent special committee . . . does not itself shift the burden. At least two factors are required. First, the majority shareholder must not dictate the terms of the merger. Rosenblatt v. Getty Oil Co., Del. Supr., 493 A.2d 929, 937 (1985). Second, the special committee must have real bargaining power that it can exercise with the majority shareholder on

an arm length basis. Id.

1990 Del. Ch. LEXIS 50, *18, Del. Ch., Consolo C.A. No. 7547, Chandler, V.C.,

(Apr. 17, 1990), aff'd, DeL. Supr., S86A.2d1202 (1990). '

Due to Haan' s misconduct, the other directors were not in a position to barg