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Delaware Chancery Court Resolves Dispute Among Appraisal Petitioners By Appointing Lead Appraisal Counsel
12/19/2016On December 8, 2016, Vice Chancellor Joseph R. Slights of the Delaware Court of Chancery granted a motion to appoint lead counsel in an appraisal action—over the objection of one group of petitioning shareholders—invoking the inherent power of the Court to manage its operations. In re Appraisal of Rouse Properties, Inc., C.A. No. 12609 (Del. Dec. 8, 2016). In so deciding, Vice Chancellor Slights analogized appraisal proceedings to class actions and found that the appointment of lead counsel in an appraisal proceeding did not infringe on petitioning shareholders’ statutory right to “participate fully” in the action.
This appraisal proceeding arose in connection with a merger between Rouse Properties Inc. (“Rouse”) and an affiliate of Brookfield Asset Management, Inc. (“Brookfield”), in which Brookfield acquired Rouse for $18.25 per share in an all-cash transaction. After the merger closed in July 2016, two major contingents of appraisal petitioners emerged: the “Majority Petitioners,” representing approximately 75% of appraisal-eligible shares, and the “Brookdale Petitioners,” accounting for approximately 21% of the shares that demanded appraisal. Each group of petitioners engaged their own counsel and filed separate petitions for appraisal.
The Majority Petitioners then moved to consolidate the cases and to have their counsel (“Majority Counsel”) appointed as lead counsel in the consolidated proceeding. There was no opposition to the motion to consolidate. But the Brookdale Petitioners opposed the motion to appoint lead counsel and invoked 8 Del. C. § 262(h), which provides in part that an eligible stockholder “may participate fully in all proceedings until it is finally determined that such stockholder is not entitled to appraisal rights under this section.” Specifically, they argued that “the Court cannot force them to accept [Majority Counsel] as lead counsel because such court-ordered leadership structure would deny [them their] statutory right to ‘participate fully’ in this appraisal proceeding.”
Vice Chancellor Slights, however, rejected the Brookdale Petitioners’ contention that the right to “participate fully” in the proceeding precluded the appointment of lead counsel over their objection. Instead, citing dictionary definitions and referencing the statutory context, the Court held that the right to “participate” does not equate to the right to “direct,” and found that the appointment of lead counsel would not deny the Brookdale Petitioners their “right to ‘take part’ fully in this appraisal litigation along with all of the other petitioners.” The Court highlighted that—because “the issue in appraisal is fair value; nothing more and nothing less”—the interests of the Brookdale Petitioners “are perfectly aligned with all other petitioners seeking appraisal; they all share an absolute incentive to obtain the highest possible value for their Rouse shares.”
The Court also held that it had the “inherent power to appoint a leadership structure that it believes will further the efficient, consistent and fair litigation” of the appraisal proceeding. In this regard, the Court found that an appraisal proceeding “is in the nature of a class action.” Therefore, the Court “look[ed] for guidance” to the factors for determining lead class counsel, as set forth in Hirt v. U.S. Timberlands Service Co., 2002 WL 1558342, at *2 (Del. Ch. July 3, 2002). Emphasizing that the Hirt factors are guidelines to be applied on a case-by-case basis, Vice Chancellor Slights focused primarily on the “relative competing economic stakes of the litigants,” finding that this factor “heavily favors [Majority Counsel].” Giving this factor “great weight” in accordance with Hirt, the Court granted the motion and appointed Majority Counsel as lead counsel.
