Posts in Appraisal

Delaware Supreme Court Rules That Directors Lack Standing to Bring Derivative Suits

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. More ›

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Court of Chancery Adopts New Approach For Insurance Company Appraisal

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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Court of Chancery Explains Appraisal Valuation Process

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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Court of Chancery Upholds Beneficial Owners' Appraisal Rights

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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Court of Chancery Finds Hidden Appraisal Right

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. More ›

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Court of Chancery Limits Appraisal Demands

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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Court of Chancery Holds 5 Days Is Too Short For Merger Announcement

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. Share

Court of Chancery Awards Both Appraisal And Equitable Relief

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. More › Share

Court of Chancery Finds Merger Between Controlling Stockholder and Subsidiary Unfair

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. More › Share

Court of Chancery Denies Request for Two-Tier Confidentiality Order

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. More › Share

Court of Chancery Finds Remedy for Breach of Fiduciary Duty Identical to Appraisal Award

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. More ›

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Court of Chancery Imposes Class Certification with Hedge Fund as Class Representative

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. More ›

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Court of Chancery Accepts Fiduciary Status Through Partnership Interest-Assignment And Appraises Interest's Value

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. More › Share

Court of Chancery Determines Fair Value Of Stock In Appraisal Action

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. More › Share

In Appraisal Action, Court of Chancery Employs Discounted Cash Flow and Comparable Companies Methods To Value Shares Purchased by 98% Owner in Cash-Out Merger

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. More › Share