In re United Capital Corp., S’holders Litig., C.A. No. 11619-VCMR (Del. Ch. Jan. 4, 2017) (Montgomery-Reeves, V.C.)
In this memorandum opinion, the Court of Chancery dismissed the complaint, which sought a quasi-appraisal remedy in connection with a short-form merger based on alleged disclosure deficiencies. The Court held that the allegedly omitted information in the written notice to stockholders was not material to a stockholder’s decision to seek appraisal.
Former stockholders of United Capital Corporation (“United Capital” or the “Company”) challenged a short-form merger in which entities controlled by A.F. Petrocelli (“Petrocelli”), which owned 94% of the outstanding shares of United Capital prior to the transaction at issue, purchased the minority shares in the Company. The transaction was negotiated by a special committee of the United Capital board, which decided not to engage a financial advisor but did retain legal counsel to assist in the evaluation of the proposed transaction. The special committee agreed to a deal at $32 per share.
In connection with the transaction, the Company distributed an eighty-page written notice of the merger (the “Notice”) to the stockholders. The Notice included, among other things, the Company’s financial statements for 2013, 2014, and 2015, seven single-spaced pages of management’s analysis of the Company’s financial status, a three page single-spaced summary of the background of the merger which included how the merger price was established and the board’s process for considering and approving the merger, and potential board and special committee conflicts.
Plaintiff asserted six disclosure claims based on the Notice. The Court rejected all of plaintiff’s disclosure claims. First, on plaintiff’s claim that the Notice did not disclose Petrocelli’s reasoning behind the merger price, the Court found that the Notice provided stockholders with the rationale behind Petrocelli’s offer and relevant financial information behind the merger price. The disclosed information allowed the stockholders to determine whether the price was set by “arbitrarily rolling the dice.” The Court concluded that any additional information would not alter the total mix of information available under the circumstances.
Second, with respect to the disclosure of the special committee’s determination of a fair price, the Court held that the Notice provided comprehensive information regarding the special committee’s process and regarding the board’s consideration of numerous factors in determining that the merger price was fair. The Court concluded that with the disclosed information stockholders could determine whether the merger price was arbitrarily “picked out of a hat” or was based on some concrete evidence.
Next, on the claims that the Notice did not have sufficient financial data about the Company’s projections or working capital, the Court highlighted the “breadth” of financial information already disclosed, and dismissed plaintiff’s claim that the Company failed to disclose financial projections when there was no factual support for the existence of such projections nor was there a showing of materiality. In particular, the Court emphasized that minority stockholders are not entitled to all facts material to their own valuation assessment in a short-form merger.
Lastly, the Court rejected plaintiff’s claims that the Notice did not adequately discuss the independence of two directors on the Special Committee nor the potential conflicts for certain other directors. In so ruling, the Court held that the Notice disclosed the special committee’s existence and negotiation process, the two directors’ potential conflicts, and the Company’s financial and business information necessary to inform stockholders about whether to seek appraisal.