In re Appraisal of the Aristotle Corp., C.A. No-5137-CS (Del. Ch. Jan. 10, 2012) (Strine, C.)
In In re Appraisal of the Aristotle Corp., C.A. No. 5137-CS (Del. Ch. Jan. 10, 2012) (Strine, C.), the Delaware Court of Chancery considered whether former stockholders who commence a statutory appraisal proceeding in connection with a short-form merger under 8 Del. C. § 253 have standing to also assert breach of fiduciary duty claims seeking damages for alleged disclosure violations in connection with the merger. The Court granted defendants’ motion to dismiss, finding that plaintiffs suffered no distinct injury from the allegedly faulty disclosures, and thus lacked standing to challenge them. Any decision rendered on the disclosure claim would therefore provide only an impermissible advisory opinion.
Petitioners brought separate, subsequently consolidated appraisal actions in December 2009 and January 2010 after a completed short-form merger executed by a controlling stockholder. A year and a half into their appraisal action, and with trial scheduled for December 5, 2011, plaintiffs filed a fiduciary duty complaint alleging that defendants’ failure to accurately disclose material information deprived petitioners of their right to decide whether to seek appraisal with full information. The Court was thus called on to decide the “obscure question” of whether “petitioners who already have the right to seek appraisal in connection with a § 253 merger [may] add an additional claim alleging that the directors breached their fiduciary duty to disclose the material facts necessary for the stockholders to determine whether to seek appraisal.”
The Chancellor acknowledged the lack of case law addressing the issue, but identified his prior decision in Andra v. Blount, 772 A.2d 183 (Del. Ch. 2000) as the most analogous precedent. That case challenged a merger between a corporation and its controlling stockholder structured as a tender offer and follow-on short-form merger. The plaintiff initially sought an injunction based on alleged disclosure violations, but later withdrew her motion and opted instead to seek money damages after the transaction closed. She did not tender her shares, and perfected her appraisal rights, based on the same disclosures that she alleged, in her post-closing action, to have been inadequate. She alleged that faulty disclosures prevented other stockholders from making an adequately informed choice between tendering into the offer and seeking appraisal. Then-Vice Chancellor Strine held that the plaintiff had no standing to bring her disclosure claim because, having decided to seek appraisal, she could not have suffered an injury as a result of any allegedly incomplete or misleading disclosures.
The Chancellor concluded that his earlier reasoning in Andra applied “even more easily” in the present case because petitioners did not bring a pre-closing disclosure claim or motion for injunctive relief and only decided to seek appraisal “when it was clear the Merger was going to close anyway.” Moreover, the Chancellor found it especially important that the petitioners had never sought class treatment, and suggested that a different outcome might result in a case where petitioners had done so. The Chancellor further explained that Andra should apply more forcefully “where the petitioners have challenged disclosures issued in connection with a statutory short-form merger, given that these mergers are exempted from entire fairness review in the first instance.” He therefore concluded that the defendants’ motion to dismiss should be granted, citing three considerations.
First, the Chancellor concluded that the disclosure claim would bring the petitioners no relief that they would not already receive through their appraisal action and that they therefore lacked standing to pursue such a claim. The petitioners had premised their disclosure allegations on the theory that they were deprived the opportunity to do what they had clearly done: perfect their right to appraisal. Rather than offering a means to redress an injury not otherwise cognizable in their existing appraisal action, the Court found that the petitioners’ disclosure claim would merely “yield the petitioners a right to a ‘quasi’ version of something they already possess in its actual form.”
Second, the Chancellor concluded that, having suffered no injury, petitioners sought only an advisory opinion with their disclosure claim.
Finally, the Chancellor addressed the possibility of awarding nominal damages for petitioners’ disclosure claim and concluded that the reasoning of disclosure cases in which such awards were granted did not apply in the instant action. Petitioners had suffered no damage because they had perfected their appraisal rights despite defendants’ allegedly faulty disclosures. Moreover, petitioners’ very act of filing a disclosure claim in addition to their existing appraisal action had “already subjected the defendants to nominal damages,” by requiring them to expend “tens of thousands of dollars” and to endure a five-month delay in the litigation. Thus, the Court concluded, “any need for nominal damages to extract some flesh has already been achieved.”