Delaware Supreme Court Reverses Dismissal Of A Post-Merger Suit For Alleged Breach Of Fiduciary Duty Related To Disclosures On Appraisal Rights
On July 19, 2022, in an opinion authored by Justice Gary F. Traynor, a majority of the Supreme Court of Delaware sitting en banc affirmed in part and reversed in part the dismissal of breach of fiduciary duty claims against the directors of a real estate investment trust (the “Company”) brought by former stockholders of the Company after its acquisition. In re GGP, Inc. Stockholder Litigation, No. 202, 2021 (Del. July 19, 2022). Plaintiffs alleged that the merger was structured to eliminate the statutory appraisal rights of the Company’s stockholders and that the proxy disclosures regarding appraisal rights were misleading. The Delaware Court of Chancery had dismissed the claims. On appeal, the Delaware Supreme Court affirmed the dismissal of the claim alleging an improper merger structure because “defendants did not, by paying a large portion of the merger consideration by way of a pre-closing dividend, structure the merger in a manner that effectively and unlawfully eliminated appraisal rights.” However, the Court reversed the dismissal of the disclosure claim because it found the complaint adequately alleged that defendants “consciously crafted the transaction and the related disclosures in such a way as to deter [the Company’s] stockholders from exercising their appraisal rights.”
As explained by the Court, the Delaware appraisal statute, 8 Del. C. § 262, under certain circumstances in connection with a merger, entitles a dissenting stockholder to “receive her pro rata share of the fair value of the appraised company,” without considering any synergies or value arising from the merger, “instead of accepting the consideration offered in the approved transaction.” In this case, the mechanics of the merger included a pre-closing dividend (payable the day before closing) amounting to 98.5% of the $23.50 per share deal consideration (more than $9 billion of the $9.25 billion in cash) and only $0.312 per share at closing. The merger was approved by 94% of stockholders unaffiliated with the acquirer. In addition to challenging the structure of the merger as it related to appraisal rights, plaintiffs alleged that the proxy was misleading because it disclosed that the appraised fair value of the Company “may be greater than, the same as or less than” the “per share merger consideration”—i.e., $0.312 per share for a company being sold for $23.50 per share.
Addressing what it characterized as the “threshold question” on appeal, the Court held that “dividends that are conditioned on the consummation of a merger are treated as merger consideration . . . meaning that the fair value of an entity that declares a conditional dividend . . . is appraised as if the dividend had not been declared.” The Court further held that the receipt by a stockholder of such a “conditional dividend that is merger consideration as a matter of law does not result in the abandonment of a stockholder’s appraisal right.” The Court explained that the appraisal statute does not prohibit the receipt of dividends payable before the merger effective date and that case law precluding stockholders accepting merger consideration from seeking appraisal “does not apply to the choiceless receipt of a mandatory payment” such as the pre-closing dividend in this case.
Thus, according to the Court, a “properly conducted appraisal would have allowed otherwise eligible dissenters to participate, despite their receipt” of the pre-closing dividend, and “would have valued [the Company] as if none of the steps of the [t]ransaction . . . had taken place,” including both the pre-closing dividend and the consideration at closing. Therefore, plaintiffs failed to state a claim that the deal effectively deprived stockholders of the right to seek appraisal.
However, the Court held that “the disclosures, having described the merger and appraisal rights in a confusing manner, did not provide the stockholders the information they needed to decide whether to dissent and demand appraisal.” The Court explained that “it is reasonably conceivable” that a stockholder of the Company “who read the [p]roxy would have taken it at its word and concluded that appraisal rights were limited to the fair value of [the Company] after payment of the [p]re-[c]losing [d]ividend.”