City of N. Miami Beach Gen. Emps.’ Ret. Plan, et al. v. Dr Pepper Snapple Grp., Inc., et al., C.A. No. 2018-0227-AGB (Del. Ch. June 1, 2018) (Bouchard, C.)
In this decision, the Court of Chancery ruled on cross-motions for summary judgment and held that stockholders were not entitled to appraisal rights under Section 262 of the General Corporation Law of the State of Delaware (“Section 262”) in connection with a merger transaction involving Dr Pepper Snapple Group, Inc. (“Dr Pepper”). In doing so, the Court held that the term “constituent corporation” as used in Section 262 means “an entity actually being merged or combined and not the parent of such an entity.” (emphasis in original).
The transaction at issue was structured as a reverse triangular merger pursuant to which a wholly owned subsidiary of Dr Pepper would be merged with and into Maple Parent Holdings Corp. (“Maple Parent”), a private entity that indirectly owns Keurig Green Mountain, Inc. (“Keurig”). As a result of the merger, Keurig would become a wholly-owned subsidiary of Dr Pepper and each share of Maple Parent common stock would be converted into the right to receive shares of newly-issued Dr Pepper common stock. In addition, Maple Parent is obligated to declare a $9 billion cash dividend to be paid to Dr Pepper upon the consummation of the merger, which Dr Pepper would then pay to its stockholders of record as of the business day immediately preceding the merger in the form of a $103.75 per share special dividend. Upon consummation of the merger, Maple Parent’s former stockholders will own approximately 87% of Dr Pepper common stock, with Dr Pepper’s public stockholders owning the remaining 13%. Dr Pepper’s stockholders are not being asked to vote on the merger. However, the merger will only be consummated if Dr Pepper stockholders vote to approve the following two proposals necessary to effectuate the transaction: (1) a proposal to approve the issuance of Dr Pepper common stock as consideration pursuant to the merger agreement, and (2) a proposal to approve an amendment to the certificate of incorporation of Dr Pepper to provide for an increase in authorized shares to permit the issuance of a sufficient number of shares as merger consideration.
Dr Pepper stockholders commenced an action to determine whether they have appraisal rights under Section 262. Plaintiffs raised two related claims: (1) that members of the Dr Pepper Board breached their fiduciary duties by failing to inform stockholders of their appraisal rights in the connection with the merger; and (2) that the preliminary proxy statement violated Section 262(d)(1) by failing to inform stockholders of their appraisal rights. The Court found that Dr Pepper stockholders are not entitled to appraisal rights because the requirements for appraisal rights under Section 262 were not met. Dr Pepper stockholders did not qualify for appraisal rights because Dr Pepper is not a “constituent corporation,” and the stockholders are retaining their shares in connection with the merger.
Section 262(b) provides appraisal rights only for the stock of a “constituent corporation” in connection with a merger. Because Section 251(a) provides that any “2 or more corporations may merge into a single surviving corporation, which may be any 1 of the constituent corporations or may consolidate into a new resulting corporation formed by the consolidation” the Court concluded that “constituent corporations” are “entities that actually were merged or combined in the transaction and not a parent of such entities.” (emphasis in original).
The Court relied on In re Inergy L.P. Unitholder Litigation, 2010 WL 4273197, at *10 (Del. Ch. Oct. 29, 2010), to bolster its conclusion that, in this type of merger, “the parent does not become a constituent to the merger between the target and the subsidiary.” As a result, the stockholders of the parent are not entitled to vote on the merger, nor are they entitled to appraisal rights. The Court declined to follow plaintiffs’ alternative interpretation, which heavily relied on dictum to argue that Dr Pepper should be considered a constituent corporation even though it is not being merged or combined with another entity.
The Court further held that, even if Dr Pepper were a constituent corporation, Dr Pepper stockholders would not be entitled to appraisal rights because they are not being forced to give up their shares in connection with the proposed merger. The Court noted that the second step of the appraisal-entitlement analysis—“the market-out exception”—was met because Dr Pepper’s shares are listed on a national securities exchange, which forecloses appraisal rights under Section 262(b)(1) unless under the third step of the analysis—the “exception to the exception”—appraisal rights are restored to a class of securities otherwise covered by the “market-out exception.” The Court then found that the “exception to the exception” did not restore appraisal rights to Dr Pepper’s stockholders because they are not required to accept anything for their Dr Pepper shares in the merger. The only situation in which stockholders are entitled to appraisal rights under the “exception to the exception” is “when those shares are being taken from them in certain, statutorily specified types of transactions.” (emphasis in original).
Lastly, the Court distinguished this transaction from the form of the transaction at issue in Louisiana Municipal Police Employees’ Retirement System v. Crawford, 918 A.2d 1172 (Del. Ch. 2007), which “neatly meets Section 262’s requirements”, and found that Section 262 does not bestow appraisal rights simply upon a sale of control.