Delaware Law Updates
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Berger v. Pubco Corp., No. 3414-CC (Del. Ch. May 30, 2008)

May 30, 2008

The Court held that failure to disclose the method by which a parent corporation determines the merger price in a short-form merger in which there is little information available about the target corporation breaches the obligation to disclose material information to minority stockholders to aid in their decision of whether to accept the merger price or to seek appraisal. The proper remedy for such a breach, along with the failure to include the most recent copy of the Delaware appraisal statute in the notice to minority stockholders, is “quasi-appraisal” as governed by the Gilliland decision. In the context of a short-form merger, minority stockholders are entitled to all factual information material to the decision of “whether to accept the merger consideration or seek appraisal.” Chancellor Chandler rejected the defendants’ argument that disclosure of the method of determining the price is unnecessary in shortform mergers and explained that in the case of “an unregistered company that made no public filing and whose Notice was relatively terse and short on details, the method by which . . . [the merger price was set] is a fact that is substantially likely to alter the total mix of information available to the minority shareholder."  Under these circumstances, the disclosure of method was important to whether the stockholder could “trust that the price offered . . . [was] good enough, or . . . [whether] it likely undervalue[d] the Company so significantly that appraisal [was] a worthwhile endeavor.” Because “the inadequacy of disclosures cannot possibly have caused a merger to happen where it otherwise would not have” in a short-form merger, the court fashioned a “quasi-appraisal” remedy to preserve the stockholders’ statutory right to appraisal under Section 253. The court compared the Nebel and Gilliland decisions on quasi-appraisal and determined Gilliland was more on point. Thus, the court directed the parties to prepare an order requiring four items: (1) the corporation make supplemental disclosures regarding the method used to derive the merger price and include the proper version of the appraisal statute; (2) provide the minority stockholders with an “opt-in procedure[]” so as to “’replicate the situation they would have faced if they had received proper notice;’” (3) the “’quasi-appraisal action should be structured to replicate a modicum of the risk that would inhere if this were an actual appraisal action, i.e., the risk that . . . the dissenting stockholders will receive less than the merger consideration; '" and (4) require valuation of the corporation’s “shares as of the date of the merger using the method prescribed by the appraisal statute.”

The full opinion is available here