I.A.T.S.E. Local No. One Pension Fund v. General Electric Company, C.A. No. 11893-VCG (Del. Ch. Dec. 6, 2016) (Glasscock, V.C.)
In this memorandum opinion, the Court of Chancery rejected defendants’ argument that certain fiduciary duty claims asserted by a pension fund with respect to a squeeze out merger adhered to the stock received as consideration in the merger, and found that the pension fund had standing to pursue those fiduciary duty claims despite the fact that the pension fund had sold its stock following the consummation of the merger.
This dispute arose after a series of transactions in which General Electric (“GE”) merged its financial services subsidiary, General Electric Capital Corporation (“GECC”), into the parent company. As a result of the transactions, the holders of shares of GECC preferred stock ultimately received new shares of GE preferred stock. Despite assurances that the new preferred stock would be “of equivalent value,” the GE preferred stock was allegedly worth less due to lower dividend rates.
Former GECC preferred stockholders grew discontent and were eventually allowed to swap their GE preferred stock for other assets in exchange for the release of potential breach of fiduciary duty claims (the “Follow-on Exchange Offer”). Unfortunately for plaintiff, the pension fund sold its GE preferred stock after the merger, but before the Follow-on Exchange Offer was announced. As a result, plaintiff “was unable to benefit from the Follow-on Exchange Offer” and brought suit for breach of fiduciary duty, quasi appraisal, and materially misleading and incomplete disclosures. The Court summarily dispensed with the quasi appraisal and disclosure claims and moved on to consider the “core issue” of whether plaintiff had standing to assert a breach of duty claim.
In moving to dismiss, defendants argued that the Court’s recent decision in In re Activision Blizzard, Inc. Stockholder Litigation characterizes fiduciary duty claims as being non-personal, meaning the claim adheres to the stock and not the individual stockholder. Following this logic, defendants asserted that plaintiff sold its GE preferred stock and, along with it, any potential claim for breaches of fiduciary duty. The Court rejected this argument by finding the present case is distinguishable from the Court’s decision in Activision, and therefore denied defendants’ motion to dismiss.
According to the Court, the “Activision distinction is both more basic and more nuanced” than the argument put forth by defendants. Instead of creating new law, the Activision holding merely “represents a scholarly treatment of existing law” and is limited to situations in which a stockholder chooses to disassociate itself from the stockholder-corporate relationship and sells “into a market that ‘implicitly reflects the value of any prospective lawsuits.’”
The Court further acknowledged that it does not matter whether the transaction involves “a right to receive cash or, as here, the right to receive different stock in a different corporation.” In either event, the ongoing relationship is severed and any claims arising from the transaction will vest in the former stockholder. In reaching this conclusion, the Court relied on the non-voluntary termination of plaintiff’s interest in GECC and the market’s lack of awareness regarding the value of any potential claims in the price of the GE preferred stock. In contrast to Activision, plaintiff was involuntarily squeezed out in a merger and “nothing in the record indicates that the market . . . valued the potential breach-of-duty claim in the price of the stock.” As a result, the Court held that plaintiff should retain its breach of duty claim and “has standing to seek redress for any injury that arose from the forced conversion of its interest in GECC.”