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Krieger v. Wesco Financial Corp., C.A.6176-VCP (October 13, 2011)

Some corporate mergers give stockholders of the acquired company an option to take cash or the stock of the acquiror.  If the stockholder fails to chose, then she typically gets the cash.  The appraisal statute only provides for an appraisal claim when the stockholder is required to take cash and not publicly traded stock.  Here the plaintiff who had not made the election to take stock and so got cash argued she was forced to take cash and hence was entitled to appraisal of her shares.

The Court said "no," reasoning that so long as she had a choice she was not forced to take the cash.  Risking the wrath of some members of Congress, the Court cited to a famous French philosopher on why you still have a choice even when you do not decide to act.  That too is your choice.

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S. Muoio & Co. v. Hallmark Entertainment Investments Co., C.A. 4729-CC (March 9, 2011)

There are several different ways to value an enterprise.  For a while, discounted cash flow seemed to be the courts' preference.  Then when the markets were thought to be "efficient," market values were given weight.  This opinion is a good example of the curent state of flux where the Court is inclined to take into account all approaches, test to see if there are any outliers, look at the business realities involved and thoroughly analyze the parties' contentions before reaching a determination.  In short, it no longer is as simple as it once was and the new business world we live in seems to warrant  that approach.

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Reis v. Hazelett Strip-Casting Corporation, C.A. 3552-VCL (January 21, 2011)

When a reverse stock split eliminates minority stockholders, they are entitled to be paid the "fair value" of their stock. This decision explains what that means.  In particular, it does not mean they get the same value as if their stock were subject to an appraisal.  While the valuation process is very similar, it is affected by the standard of review involved, particularly if the squeeze out was done unfairly and the intrinsic fairness standard applies.

The opinion is also an excellent review of the overall Delaware law on the standard of review for any transaction.

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Golden Telecom, Inc. v. Global GT LP, C.A. No. 392, 2010 (December 29, 2010)

In the last few years, the Court of Chancery has sometimes expressed confidence that the deal price set after a solid market check and proper deal negotiations may be the "fair value" to be paid to dissenters in a statutory appraisal proceeding.  Here the Delaware Supreme Court firmly rejects that notion and requires the trial court to independently go through the predicable war of the experts and decide what is fair value.  While this result seems dictated by the Delaware statute, the "Great Recession" has no doubt had an impact as well.

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Roam-Tel Partners v. AT&T Mobility Wireless Operations Holdings Inc., C.A. 5745-VCS (December 17, 2010)

This decision holds that a stockholder who surenders his shares and is sent a check for the merger consideration may still demand appraisal if he returns the check and makes his demand in time.  Thus, he can change his mind if he does it fast enough.

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Berger v. Pubco Corp., C.A. 3414-CC (May 10, 2010)

This decision explains 2 points of appraisal law.  First, when the discounted cash flow approach is used to value a company, no control premium is added to the result.  That sort of premium is only used when the valuation is based on comparable market prices or "comps" that reflect the minority discount inherent in the price of a small block of stock.

Second, at least in this case, there is no deduction for the capital gain tax due on the sale of assets by a holding company.  Instead, those assets are valued on a pre-tax basis.

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Global GT LP v. Golden Telecom Inc., C.A. 3698 (April 23, 2010)

This is an interesting appraisal decision for 2 reasons.  First, the Court declined to use the price set in the market as a strong indicator of value notwithstanding recent decisions in Delaware that had been inclined to do so. The Court was not satisfied that in the case of this company with its dominant stockholders announcing that they would only support the deal on the table that there was a real market check.

Second, the Court's analysis of how to do a discounted cash flow valuation again illustrates its preference for expert opinion based on a knowledge of the industry involved.

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In re Sunbelt Beverage Corp. Shareholder Litigation, C.A. 16089-CC (January 5, 2010, revised February 15, 2010)

This is an interesting appraisal case for at least 2 reasons.  First, it illustrates what not to do in getting a fairness opinion.  A rush job with no intent to reach a fair result is doomed to be rejected. Second, the Court for the first time in recent memory notes that criticism of the efficient market theory may be justified and did not accept an arguably arms length sale as solid evidence of share value. In the past the Court was moving toward acceptance of market values as setting the "fair value" required by the Delaware appraisal statute.

The case does involve an unusual set of facts and in the long run may not mark a great shift in approach, but it is worth noting for the usual careful analysis of the facts to reach the right result free of a formulaic approach.

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DiRienzo v. Steel Partners Holdings L.P., C.A. 4506-CC (December 08, 2009)

While it is well known that appraisal rights are limited to stockholders of record, sometimes stockholders do not really understand what it means to be "of record." They think if their name is on a brokerage statement, they are a "stockholder of record." Wrong! They must be listed on the records of the company to be "of record," and most stock in public entities is held by nominees, such as Cede & Co., to facilitate trading.

Here, the Court examines when the corporation is estopped by its conduct from denying appraisal rights and finds that the elements of waiver or estoppel are hard to establish and not present in this case.

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Julian v. Julian, C.A. 4137-VCP (September 9, 2009).

For a number of reasons, a plaintiff may seek to litigate his claim in the Court of Chancery rather than trust his case to arbitration.  This decision illustrates how hard it is to avoid arbitration when the arbitration clause in the parties' contract is broadly drafted.  Thus, this decision holds that the statutory right to fair value for a retiring member of an LLC may be subject to arbitration, if the LLC agreement so provides.

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Berger v. Pubco Corporation, Del Supr. C.A. 509, 2008 (July 9, 2009)

In this precedent setting decision, the Supreme Court holds that stockholders who are cashed out in a short-form merger may bring a class action for damages when there are violations of the duty of disclosure in the materials sent to them notifying them of the merger. In prior decisions, the Court of Chancery had reached somewhat inconsistent results in such cases, granting a quasi-appraisal remedy, but sometimes requiring stockholders to opt-in to be part of the stockholder group obtaining appraisal rights and also requiring an escrow of the merger consideration.

Here, the Supreme Court rejected both of those limits on the remedy. Instead, it held that all the minority stockholders had the right to be part of a class entitled to appraisal rights, subject to a right to opt-out of the class. In addition, stockholders do not have to escrow any of the merger consideration while the action is pending.

This result creates a "free rider" issue as there is little incentive for stockholders to opt-out. While it is possible the trial court will decide the fair value of their stock in the appraisal proceedings is less than the merger consideration, for smaller stockholders, the amounts in question may not justify the company enforcing any right to a refund.

Of course, the way out of this dilemma is to provide fair disclosure in the first place.

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Andrew And Suzanne Schwartz 2000 Family Trust v. AM Apparel Holdings, Inc., C.A. 3172-VCS (Del. Ch. July 28, 2008)

The Delaware law has long been that the statutory requirements to obtain appraisal rights must be met, exactly. However, this decision is another example of when the Court will uphold appraisal rights when the company itself fails to comply with the statutory obligation of notice or has issued a confusing notice of the right to demand appraisal.

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Berger v. Pubco Corp., C.A. 3414-CC (Del. Ch. May 30, 2008)

More often than we may expect, Delaware corporations commit errors in notifying stockholders of their right to an appraisal after a merger. For some reason, on several occasions the wrong version of the appraisal statute was sent to the stockholders, violating the statutory requirement that a current version accompany the notice of appraisal rights. More commonly there is a disclosure problem, often a failure to provide enough information to permit the stockholders to decide if they should seek appraisal rights. This case involves both using the wrong version of the statute and failing to tell the stockholders of a closely held company how the merger price was set. Both those errors called for the Court to grant quasi appraisal rights.

The decision is particularly interesting for its explanation of how quasi appraisal proceedings should work. Basically, it involves starting all over again by sending out a corrected notice with the right statute attached and giving stockholders another chance to seek appraisal. Note that this is more favorable to the company than simply holding that the case may proceed as a class action for all minority stockholders.

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Schoon v. Smith, C.A. No. 554, 2006 (Del. Feb. 12, 2008).

In an important ruling, the Delaware Supreme Court upheld bedrock principles of Delaware corporate law and governance and rejected plaintiff’s argument that directors of Delaware corporations should have standing to bring derivative suits on behalf of companies upon whose boards they sit.

In Schoon, Plaintiff Richard Schoon was a director of Troy Corporation. He was elected to the Troy board by the Series B stockholder, Steel, which had the right to appoint one member to a five member board. Schoon himself owned no Troy shares but rather acted at the behest of Steel. Schoon brought derivative claims purportedly on behalf of Troy alleging breaches of fiduciary duty by his fellow board members.  Steel had also sought books and records pursuant to Section 220 of the Delaware General Corporation Law (“DGCL”).

The defendants moved to dismiss the case, arguing that Schoon lacked standing to assert such derivative claims. The Court of Chancery agreed and dismissed the action. The Court of Chancery relied upon well established precedent, albeit precedent that had never been tested at the Supreme Court level. Schoon appealed.

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Highfields Capital LTD. v. AXA Financial Inc., C.A. No. 804-VCL (August 17, 2007).

This decision illustrates the point that in an appraisal proceeding the  type of business involved may lead to a different approach to valuation. Typically, Delaware courts use the discounted cash flow method to set an appraisal value. Here, however, the Court held that a combined sum of the parts and shared synergies analysis was more appropriate for an insurance company valuation.

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Crescent/Mach I Partnership LLP v. Turner, C.A. 17455-VCN (May 2, 2007).

Predicting how the Court of Chancery will determine value in an appraisal proceeding is a difficult task. To some extent, each appraisal case will involve a battle of experts. Which side will ultimately prevail can be hard to predict, at least before cross examination. Further, the discounted cash flow approach frequently used by the Court of Chancery can be complicated. This decision offers a primer on that process and is well worth the trip for those willing to put in the time.

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In re Appraisal of Transkaryotic Therapies Inc., C.A. 1554-CC (May 2, 2007).

A company subject to an appraisal petition argued that a beneficial owner who acquired its shares after the record date to vote for the merger should be required to prove that those shares had been voted against the merger by the record holder, Cede & Co.

The Court rejected that argument and noted that the Delaware Supreme Court has long held that a beneficial owner may demand appraisal through a record owner such as Cede & Co. Given that it is not practical for a beneficial owner to trace its shares through depositories such as Cede, this result seems fair and in compliance with prior decisions.

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Louisiana Municipal Police Employees' Retirement System et al v. Crawford, C.A. No. 2635-N (Del. Ch. February 16, 2007).

In Delaware's corporate law, the doctrine of independent legal significance has a great importance. Basically, this means that if a transaction is authorized by any provision of our law, then it may go forward even if, in substance, it may seem to violate some other provision of that law. Thus, for example, a merger that really seems to be a sale of assets is still valid if it complies with the terms of the statute governing mergers. Here, the strength of that doctrine is called into question.

To make the merger of Caremark and CVS more competitive to a third party offer for Caremark, the directors of Caremark resolved to pay a special dividend to the Caremark stockholders. The problem was that the dividend was conditioned on those stockholders approving the merger with CVS. The plaintiffs argued that this dividend was really a cash payment as part of the merger consideration and thus triggered stockholder appraisal rights that occur when stockholders receive cash in a merger. The Court of Chancery agreed with the plaintiffs and rejected application of the doctrine of independent legal significance.

The result clearly was influenced by the evidence that the Caremark directors were motivated to declare the dividend to make the merger go through and thereby receive large personal benefits in the form of change of control payments. The point then is that when  the so-called "independent" event is really tied to personal interest and not to just getting a deal done, the Court is less likely to give it recognition as truly independent.

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Konfirst v. Willow CSN Incorporated, C.A. No. 1737-N (Del. Ch. December 12, 2006).

Delaware law has long held that to qualify for appraisal rights after a merger, a stockholder must follow the statutory rules carefully. Here, many stockholders filed their demand for appraisal too late and the Court barred their claims for failure to file on time. Other stockholders failed to have their demands signed by all the record owners, another fatal defect.

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Berger v. Intelident Solutions Inc., C.A. No. 1527-N (Del. Ch. October 12, 2006).

Under Delaware law, when a stockholder files suit over a merger she may be limited to appraisal rights when her concern is only over the price to be paid. It is often difficult to decide when a complaint is limited to the price and does not also deal with unfair dealing claims that are appropriate for class litigation. Here, the Court held that a complaint that alleged only 5 days notice of a merger and the right to seek appraisal did properly allege unfair dealing and could proceed as a class claim.

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In re PNB Holding Co. Shareholders Litigation, C.A. No. 28-N (Del. Ch. August 18, 2006).

As it has several times in recent years, the Court of Chancery has decided a case combining appraisal rights and a class claim for inequitable treatment in a merger. The Court held that when directors get together to freeze out the other stockholders the entire fairness test applies even when they do not own a majority of the stock. This follows because the interests of those directors in remaining shareholders differs from the other shareholders who will be frozen out. Absent some insulating procedure such a majority of the minority vote, the directors then have the burden of proving the merger was entirely fair.

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Gesoff v. IIC Indus. Inc., C.A. No. 19473, 2006 WL 1458218 (Del. Ch. May 18, 2006).

Plaintiff filed a class action, claiming a merger was the subject of unfair dealing and produced an unfair price. Another plaintiff filed a statutory appraisal claim based on the same merger.

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In re Transkaryotic Therapies, Inc., C.A. No. 1554-N, 2006 WL 1388749 (Del. Ch. May 10, 2006).

Respondent in appraisal action sought two-tier, rather than one-tier, confidentiality order.

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Delaware Open MRI Radiology Associates, P.A. v. Kessler, C.A. No. 275-N, 2006 WL 1215096 (Apr. 26, 2006).

This case was described by Vice Chancellor Strine as "another progeny of one of our law's hybrid varietals: the combined appraisal and entire fairness action." The court was tasked with determining whether the share price in a squeeze-out merger was fair, and, if not, what the extent of the underpayment to the minority shareholders was. The court found that the merger price was unfair, and finding no difference between the award the petitioners/plaintiffs would receive in appraisal or in equity, the court awarded an amount equivalent to petitioners' pro rata share of the company's appraisal value on the date of the merger.

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Regal Entertainment Group v. Amaranth LLC, C.A. No. 1226-N, 2006 WL 948257 (Del. Ch. Apr. 12, 2006).

Plaintiff, Regal Entertainment Group, asked the Court of Chancery to grant its motion for certification of defendant class. Plaintiff is the issuer of a series of convertible notes under an indenture and defendant Amaranth is one of the largest holders of these notes. After a public dispute regarding Regal's method of calculating the number of shares of common stock upon conversion, Regal filed a lawsuit against Amaranth seeking a declaration that its calculation was correct. Amaranth counterclaimed that its calculation of conversion was correct. The only objection that Amaranth raised to the motion for certification was that its status as a hedge fund should relieve it of the obligation to serve as the representative of a defendant class. The court granted Regal's motion for class certification finding that Amaranth is well-positioned to represent the class as it seeks to advance an interpretation of the calculation provisions of the indenture contrary to Regal's, which affects all noteholders.

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Ramunno v. Capano, et al., C.A. No. 18798-NC, 2006 WL 375541 (Del. Ch. Feb. 10, 2006).

This is a fiduciary claim based action to appraise the fair value of real property brought by the trustee of four trusts that held a 12.1% interest in that property held by the defendant entity and its two majority interest holders, after that entity's merger into a new Delaware limited partnership.

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Henke v. Trilithic Inc., C.A. No. 13155, 2005 WL 2899677 (Del. Ch. Oct. 28, 2005).

Plaintiff, who was a stockholder of Trilithic, Inc., brought an appraisal action against Defendant Trilithic under 8 Del. C. §262.

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Andaloro v. PFPC Worldwide, Inc., C.A. No. 20289, 2005 WL 2045640 (Del. Ch. Aug. 19, 2005).

Andaloro v. PFPC Worldwide, Inc., C.A. No. 20336, 2005 WL 2045640 (Del. Ch. Aug. 19, 2005).

This was a consolidated appraisal and equitable fiduciary duty action (the court did not address the fiduciary claim in this opinion). It arose out of a merger in which PFPC Worldwide, Inc. ("PFPC"), was acquired by its parent PFPC Holding Corp. ("Holding"), which held over 98% of PFPC's stock before the merger. (The merger was also approved by PFPC's ultimate parent and Holding's immediate parent, PNC Financial Services Group, Inc. ("PNC").) The merger resulted in the elimination of the minority shareholders' position in PFPC for $34.26 per share.

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Finkelstein v. Liberty Digital, Inc., 2005 WL 1074364 (Del. Ch. April 25, 2005).

This appraisal case involved the fair value of shares of a company, Liberty Digital, Inc., that was merged with an acquisition subsidiary of Liberty Media Corporation and survived the merger as a wholly owned subsidiary of Liberty Media. What was atypical about this appraisal case was that the parties were able to stipulate to the value of all but one of Liberty Digital's assets.

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Gilliland v. Motorola, Inc., 873 A.2d 305 (Del. Ch. 2005).

Plaintiff sought a class-wide "quasi-appraisal" remedy for minority stockholders eliminated in a short-form merger. Statutory appraisal was impractical for two reasons. First, formalistically, the minority stockholders no longer owned shares in the merged subsidiary and without the shares, they could not make the demand required by the appraisal statute. Second, from a practical standpoint, the two-year delay made it impossible to recreate the factual context necessary to have statutory appraisal. Therefore, Vice Chancellor Lamb granted the quasi-appraisal remedy and outlined its procedure.

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Encompass Services Holding Corp. v. Prosero Incorp. f/k/a FacilityPro.com Corp., C.A. No. 578-N, 2005 WL 332810 (Del. Ch. Feb. 03, 2005).

This is a 8 Del. C. §262 share appraisal case brought by a "debtor in possession" after the dismissal of its earlier filed adversarial proceeding in the bankruptcy court.

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In re United States Cellular Operating Co., C.A. No. 18696-NC, 2005 WL 43994 (Del. Ch. Jan. 06, 2005).

This is a share appraisal action involving cellular phone corporations under 8 Del. C. §262.

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