Delaware Chancery Dismisses Quasi-Appraisal Claim Challenging Short-Form Merger
On January 4, 2017, Vice Chancellor Tamika Montgomery-Reeves of the Court of Chancery of the State of Delaware dismissed a putative class action complaint against United Capital Corporation (“United Capital”), its board of directors, and A.F. Petrocelli, who is board chairman and CEO, and the owner of 94% of United Capital’s stock, in connection with a short-form merger through which Petrocelli acquired all outstanding stock of the company. In re United Capital Corp., Stockholders Lit., C.A. No. 11619-VCMR (Del. Ch. Jan. 4, 2017). Plaintiffs sought a quasi-appraisal remedy for allegedly inadequate disclosures in the notice of merger. The court found the disclosures provided sufficient material information to the minority shareholders to enable them to determine whether to pursue an appraisal and dismissed the claims.
Petrocelli made an initial offer of $30 per share for the minority shares of the company. The board set up a special committee and engaged legal counsel to vet the adequacy of the consideration, and after exchanging counteroffers, agreed that the final price of $32 per share was fair consideration. Following notice of the merger to the minority shareholders, the merger was executed. Plaintiff alleged that defendants failed to disclose in the merger notice facts material to the minority stockholders’ decision as to whether to seek appraisal. On that basis, plaintiff sought a quasi-appraisal remedy; absent such a disclosure violation, the only remedy available to a minority shareholder dissatisfied with the price of a short-form merger is appraisal.
The Court found that the merger notice contained substantial and detailed disclosures and rejected plaintiff’s arguments that material information was missing. The Court cited approvingly the detailed disclosures about the price negotiations, the “robust” financial disclosures, detailed information about Union Capital’s business operations, historical and forward-looking performance, and disclosures regarding available cash reserves. As further evidence of the adequacy of the financial disclosures, the Court pointed out that plaintiff himself used the financial statements attached to the notice to allege that the merger consideration was inadequate. The Court also found sufficient the disclosures about potential conflicts of interest between the special committee members and the company, holding that no further detail was necessary for plaintiff to decide whether he could rely on the special committee’s independent assessment of the adequacy of the merger consideration. Accordingly, the Court dismissed plaintiff’s claims.
This holding reaffirms that the quasi-appraisal remedy is available only in very limited circumstances and that Delaware courts continue to carefully examine disclosure challenges that seek quasi-appraisal.