Berger v. Pubco Corp., No. 509, 208 (Del., July 9, 2009)
In a matter of first impression, the Delaware Supreme Court determined the appropriate remedy for a “short form” merger under 8 Del. C. § 253, where a corporation’s minority stockholders are cashed out without the controlling stockholder disclosing information material to a stockholder’s decision whether to seek appraisal.
The Court of Chancery determined that the controlling stockholder had breached his disclosure duty in connection with a shortform merger by (i) sending the minority stockholders an outdated copy of the appraisal statute, and (ii) failing to disclose all material facts relevant to the decision to accept the merger consideration or seek appraisal. Based on these disclosure violations, the lower court awarded a quasi-appraisal remedy under Gilliland v. Motorola, 873 A.2d 305 (Del. Ch. 2005), whereby the minority stockholders must “opt in” to the appraisal proceeding and escrow a portion of the merger proceeds they received. While the Supreme Court found that the trial court correctly determined that the controlling stockholder violated his duty of disclosure, the Court held that the lower court erred as a matter of law in ordering a Gilliland-style remedy.
In an en Banc opinion, the Supreme Court determined that the appropriate remedy, in the circumstances before the Court, for a breach of the duty of disclosure in a short form merger is the following:
First, the minority stockholders are entitled to supplemental disclosures enabling them to make a fully informed decision on whether to participate in the appraisal proceeding.
Second, those who decide to participate in the lawsuit would be entitled to seek recovery of the difference between the fair value of their shares and the merger consideration without having to establish the controlling shareholders’ personal liability for breach of fiduciary duty.
Third, the Court adopted an “opt-out” structure, whereby minority stockholders would automatically become members of a class when the controlling stockholder has breached its duty of disclosure. The Court found that the “opt-out” procedure was no more burdensome to the corporation, but less burdensome to the minority stockholders. Moreover, this procedure avoids the risk of forfeiture and thereby benefits the minority stockholders.
Fourth, the Court declined to require minority stockholders to escrow a portion of the merger proceeds they received. While the minority stockholders would enjoy a “dual benefit” by retaining the merger proceedings at the same time they litigate to recover a higher amount, the Court did not find such a result inequitable. The Court analogized the situation to the law allowing the minority stockholders to enjoy the dual benefit in a shareholder class action challenging a long form merger on fiduciary duty grounds. The Court also invoked principles of fairness to ensure that the appraisal statute is applied evenhandedly. “Minority shareholders who fail to observe the appraisal statute’s technical requirements risk forfeiting their statutory entitlement to recover the fair value of the shares. In fairness, majority stockholders that deprive the minority shareholders of material information should forfeit their statutory right to retain the merger proceeds payable to shareholders who, if fully informed, would have elected appraisal.”
Finally, the Court qualified its holding by noting that in some circumstances, such as where the only disclosure violation is the delivery of an incomplete copy of the appraisal statute, the Gilliland-style remedy might be appropriate.