Short form mergers
Chapter 10 - C
Short form mergers
• Different legal structure – all states have them
• Del. 253
• Relax stat requirements if s/h already owns 90%
or more of target
• Vote requirement empty anyway and is waived
• But why should exclusive remedy to minority s/h
be appraisal (which it is)?
Glassman
• July 25, 2001, the Delaware Supreme Court, sitting en banc
• Important issue resolved:
– fiduciary duty of a controlling shareholder to establish the entire
fairness of a "short-form," "freeze out," or "squeeze out" merger
pursuant to Section 253 of the Delaware General Corporation Law.
• Section 253 authorizes a corporation that owns at least 90 percent
of the shares of each class of the stock of a subsidiary to merge the
subsidiary into the controlling shareholder simply "by executing,
acknowledging and filing... a certificate of such ownership and
merger setting forth a copy of the resolution of its board of directors
to so merge and the date of the adoption."
– [NB: normal protections to minority s/h under 251 not in place]
Glassman
• The court acknowledged the controlling shareholder's
"seemingly absolute duty to establish the entire fairness of
any self-dealing transaction" and past decisions by the
court (not involving short-form mergers pursuant to Section
253) that have "described entire fairness as the 'exclusive'
standard of review in a cashout, parent/subsidiary merger.”
• The court held, however, that Section 253 "authorizes the
elimination of minority stockholders by a summary process
that does not involve the 'fair dealing' component of entire
fairness.“
• As a result, "a parent corporation cannot satisfy the entire
fairness standard if it follows the terms of the short-form
merger statute without more."
Glassman
• The court elaborated as follows:
– Under settled [common law] principles, a parent corporation and its directors
undertaking a short-form merger are self-dealing fiduciaries who should be
required to establish entire fairness, including fair dealing and fair price.
• The problem is that 253 authorizes a summary procedure that is
inconsistent with any reasonable notion of fair dealing.
• In a short-form merger, there is no agreement of merger negotiated by
two companies; there is only a unilateral act-a decision by the parent
company that its 90% owned subsidiary shall no longer exist as a separate
entity.
• The minority stockholders receive no advance notice of the merger; their
directors do not consider or approve it; and there is no vote. Those who
object are given the right to obtain fair value for their shares through
appraisal.
Glassman
• The equitable claim plainly conflicts with the
statute.
– If a corporate fiduciary follows the truncated process
authorized by 253, it will not be able to establish the
fair dealing prong of entire fairness.
– If, instead, the corporate fiduciary sets up negotiating
committees, hires independent financial and legal
experts, etc., then it will have lost the very benefit
provided by the statute-a simple, fast and inexpensive
process for accomplishing a merger.
Glassman
• DE Sup Ct resolves conflict by giving effect to intent of
General Assembly
• 253 must be construed to obviate the requirement to
establish entire fairness.
• The parent corporation does not have to establish entire
fairness, and absent fraud or illegality, the only recourse for
a minority stockholder who is dissatisfied with the merger
consideration is appraisal.
• Absent fraud or illegality, appraisal thus "is the exclusive
remedy available to a minority stockholder who objects to
a short-form merger."
Glassman
• The court emphasized, however, that "[a]lthough fiduciaries are not
required to establish entire fairness in a short-form merger, the duty of full
disclosure remains.“
• Minority shareholders are entitled to decide whether to accept the
merger consideration or seek appraisal, and "must be given all the factual
information that is material to that decision.“
• The court also noted that the determination of fair value in an appraisal
proceeding "must be based on all relevant factors, including damages and
elements of future value, where appropriate."
• Thus, for example, if a merger is "timed to take advantage of a depressed
market, or a low point in the company's cyclical earnings, or to precede an
anticipated positive development, the appraised value may be adjusted to
account for these factors."
Glassman
• The court acknowledged that "these are the types of issues
frequently raised in entire fairness claims," and that "we have held
that claims for unfair dealing cannot be litigated in an appraisal.”
• The court, however, stated that these "prior holdings simply
explained that equitable claims may not be engrafted onto a
statutory appraisal proceeding," and thus "stockholders may not
receive rescissionary relief in an appraisal.“
• These decisions, the court continued, "should not be read to
restrict the elements of value that properly may be considered in an
appraisal.“
• (if you say so . . . )
Glassman
• controlling shareholders need not establish
the entire fairness of a short-form merger, but
must disclose all material facts required for
minority shareholders to determine whether
to accept the merger consideration or to seek
an appraisal of fair value.
• If an appraisal is sought, it will be based on all
elements of value.
Berger v. Pubco Corp.
• This opinion extends the Glassman debate in a context in which the
controlling parent failed to provide full disclosure mentioned at the
end of the Glassman opinion.
• In the Berger case, the majority’s disclosure had been pretty
sketchy in offering minority shareholders $20 for shares that had
been trading in the market in the $12‐$16 range.
• The Court wants the minority to have all the factual information
that is material to the decision of whether to accept appraisal.
• The Chancery Court had ruled that there must be a quasi‐appraisal
action available for the minority after sufficient disclosure.
Berger v. Pubco
• Delaware Supreme Court Holding
– a “quasi-appraisal” remedy is an appropriate remedy
in a short form merger where the greater than 90
percent stockholder breached its duty to disclose
material information to the minority stockholders.
– reversed the Delaware Court of Chancery’s form of
“quasi-appraisal” remedy and instructed the Court of
Chancery to enter a quasi-appraisal remedy that
includes all minority stockholders (except those that
opt out) and to not require any minority stockholders
to escrow a portion of their previously received
merger consideration.
Berger
• Pubco Corporation (Pubco or the company) is a
Delaware corporation whose shares of common
stock were not publicly traded.
• More than 90 percent of Pubco’s shares were
owned by defendant Robert H. Kanner, who was
Pubco’s president and sole director.
• The plaintiff, Barbara Berger, was a Pubco
minority stockholder.
Berger
•
Kanner decided that Pubco should go private via a “short form” merger under
Section 253 of the Delaware General Corporation Law (the DGCL).
•
Because that short form procedure is available only to corporate controlling
stockholders, Kanner formed a wholly owned subsidiary, Pubco Acquisition, Inc.
(Acquisition) and transferred his Pubco shares to that entity to effect the merger.
•
When the merger took place, on October 12, 2007, Pubco’s minority stockholders
received $20 cash per share.
•
The only relevant corporate action required to effect a short term merger under
Section 253 is for the board of directors of the parent corporation, in this case
Acquisition, to adopt a resolution approving a certificate of merger and to furnish
the minority stockholders with a notice advising that the merger has occurred and
that they are entitled to seek an appraisal under Section 262 of the DGCL.
•
Section 253 required that the notice include a copy of the appraisal statute, and
Delaware case law required that Acquisition disclose in the notice of merger all
information material to stockholders deciding whether or not to seek appraisal.
Berger
• In November 2007, Berger received a written notice from Pubco advising
that Pubco’s controlling stockholder had effected a short form merger and
that Berger and the other minority stockholders were being cashed out for
$20 per share.
• The Notice explained that stockholder approval was not required for the
merger to become effective and that the minority stockholders had the
right to seek an appraisal.
• The Notice disclosed some information about the nature of Pubco’s
business, the names of its officers and directors, the number of its shares
and classes of stock, a description of related business transactions and
copies of Pubco’s most recent interim and annual unaudited financial
statements.
• also disclosed that Pubco’s stock, although not publicly traded, was
sporadically traded over the counter, and that in the nearly two years
preceding the merger there were 30 open market trades that ranged in
price from $12.55 to $16 per share, at an average price of $13.32.
Berger
•
the Court of Chancery found that the disclosures in the Notice provided no
significant detail regarding Pubco, its future or the determination of the merger
price, with the exception of the financial statements.
•
Notice included a description of the Company and its business, which was only five
sentences long and featured otherwise vague statements—for instance, that “[t]he
Company owns other income producing assets.”
•
The Delaware Supreme Court further noted that the Notice did not include any
disclosure regarding Pubco’s plans or prospects, nor any “meaningful” disclosure
regarding Pubco’s actual operations or of its finances by division or line of
business.
•
Del Sup Ct noted financial statements indicated that Pubco held a sizeable amount
of cash and securities but failed to explain to the minority stockholders how those
assets were, or would be, utilized.
•
Notice did not disclose how Kanner had determined the $20-per-share merger
price.
•
As required by law, the Notice did attach a copy of the appraisal statute, but the
copy attached was outdated and, therefore, incorrect and Pubco never sent a
corrected copy of the updated appraisal statute to its former minority
stockholders.
Berger – procedural posture
• On December 14, 2007, Berger initiated a lawsuit as a class action
on behalf of all Pubco minority stockholders, claiming that the class
was entitled to receive the difference between the $20 per share
paid to each class member and the fair value of the Pubco shares,
whether or not any class member had properly demanded
appraisal.
• Pubco and Kanner then filed a motion to dismiss the complaint.
• Berger responded to that motion and simultaneously filed a brief in
support of her counter-motion for summary judgment.
• Thereafter, the defendants abandoned their motion to dismiss and
filed a cross-motion for summary judgment.
• The Court of Chancery handed down its opinion on May 30, 2008,
granting the cross-motions in part and denying them in part.
Berger – chancery opinion
• In its decision the Court of Chancery found
two disclosure violations:
• (1) the wrong version of the appraisal statute
was attached to the Notice; and
• (2) the Notice did not disclose how Kanner set
the per-share merger price.
• Based on these two disclosure violations, the
Court of Chancery held that the appropriate
remedy was one of quasi-appraisal.
Berger – chancery opinion (cont.)
• The Court of Chancery then held that the form of quasi-appraisal
should be the same form as was awarded in another quasi-appraisal
case, Gilliland v. Motorola, Inc,3 because that remedy mirrored, as
best as possible, the statutory appraisal remedy.
• As a result, the Court of Chancery held that:
– (1) Pubco needed to make supplemental disclosures to the minority
stockholders to remedy the disclosure violations;
– (2) the minority stockholders needed to affirmatively opt in to the
quasi-appraisal action;
– (3) the minority stockholders that elected to opt in to the quasiappraisal action needed to escrow a portion of their merger
consideration proceeds; and
– (4) a valuation of the Pubco shares as of the merger date should be
conducted using the method prescribed by the appraisal statute.
Delaware Supreme Court Decision and Analysis
• The only issue before the Delaware Supreme Court on appeal, but one of
first impression, was the nature of the appropriate remedy for minority
stockholders in a short form merger when a fiduciary fails to meet its duty
of full disclosure.
• Berger, on appeal, argued that all of the minority stockholders should have
been treated as members of a class entitled to seek the quasi-appraisal
recovery, without being burdened by any precondition or requirement
that they opt in to the quasi-appraisal proceeding or escrow any portion of
the merger proceeds paid to them.
• In its opinion, the Court of Chancery had paraphrased the decision
in Gilliland, stating that the purpose of the requirement that minority
stockholders who opt in to a quasi-appraisal remedy escrow a portion of
their merger consideration proceeds is to replicate a “modicum of the
risk” that would be present if such minority stockholders were pursuing an
actual appraisal.
Delaware Supreme Court Decision and Analysis (cont.)
• The Delaware Supreme Court noted that, pursuant to the decision
in Glassman v. Unocal Exploration Corporation,4 the exclusive remedy for
minority stockholders who challenge a short form merger is a statutory
appraisal, provided that there is no fraud or illegality, and that all facts are
disclosed that would enable the stockholders to decide whether to accept
the merger price or seek appraisal.
• The Delaware Supreme Court held that where, as in this case, the material
facts are not disclosed, the controlling stockholder forfeits the benefit of
that limited review and exclusive remedy, and the minority stockholders
become entitled to participate in a quasi-appraisal class action to recover
the difference between fair value and the merger price without having to
opt in to that proceeding or to escrow any merger proceeds that they
received.
• As a result, the Delaware Supreme Court reversed the Court of Chancery’s
remedy and ordered that the quasi-appraisal remedy for a violation of the
fiduciary disclosure obligation should not be restricted by opt-in or escrow
requirements for the minority stockholders.
DE Sup Ct analysis (cont.)
• The Delaware Supreme Court needed to choose which
analytical standard to use in determining the most
appropriate remedy.
• The optimal alternative, the court said, would be the
remedy that best effectuates the policies underlying the
short form merger statute (Section 253), the appraisal
statute (Section 262) and the Glassman decision, taking
into account considerations of practicality of
implementation and fairness to the litigants.
Berger analysis (cont.)
• In its analysis, the Delaware Supreme Court examined
four alternative remedies for the disclosure violations
in the Notice.
• Two of the remedies were advocated by the parties in
this case and two were not.
• The two remedies that were not advocated by either
party were a “replicated” appraisal proceeding and a
remedy for a breach of fiduciary claim based on the
“entire fairness” standard of review used in long form
cash-out mergers.
• Court rejected these two
Berger (cont.)
• Court choose between the two types of quasi-appraisal
remedies advocated by each party in this case.
• court noted that the principal differences between the two
parties’ positions on the appropriate remedy was that the
defendants advocated an opt-in and escrow requirement
for minority stockholders and the plaintiff argued that
neither of these requirements should apply to the minority
stockholders in this case.
• The court found for reasons of “utility and fairness” that
the plaintiff’s position was the more appropriate remedy
and analyzed both the opt-in requirement and the escrow
requirement separately.
Berger – opt in/out requirement
analysis
• The opt-in requirement was more burdensome to
minority stockholders, the court found, and
imposed no burden to the corporation, whereas
the opt-out requirement was less burdensome to
minority stockholders and again imposed no
burden on the corporation.
• Court determined that the latter approach was
the optimal alternative for this part of the
remedy.
Berger – escrow requirement analysis
• defendant argued that without this requirement the
minority stockholders would have the “dual benefit” of
retaining their merger consideration proceeds while
litigating for a higher value, something that they would not
have had in the case of a statutory appraisal proceeding.
• Court -- this dual benefit was not inequitable to the
fiduciary that breached its duty of disclosure; law allows
minority stockholders to enjoy this dual benefit in a long
form cash-out merger being challenged on fiduciary duty
grounds.
Good for goose, good for gander
• Court noted that the corporation should be held to the same strict
compliance to the appraisal statute as minority stockholders.
• Court reasoned that minority stockholders who did not strictly
adhere to the technical requirements of the appraisal statute lose
their right to pursue an appraisal remedy and, therefore, allow a
corporation to keep the difference between the fair value of their
shares and the merger consideration paid by the corporation.
• The “appraisal statute should be construed evenhandedly, not as a
one-way street … In fairness, majority stockholders that deprive
their minority stockholders of material information should forfeit
their statutory right to retain the merger proceeds payable to
stockholders who, if fully informed, would have elected appraisal.”
Key takeaways
• majority stockholders, notwithstanding their own
technical compliance with the statute, must respect
the statutory and other legal rights of minority
stockholders, including the fiduciary duties owed to
minority stockholders, or otherwise face legal and
equitable results that they did not intend.
• Delaware courts are willing to look to equitable
solutions to remedy breaches of fiduciary duties owed
to minority stockholders by majority stockholders. The
quasi-appraisal remedy is just such an equitable
solution.