Delaware Court Of Chancery Rejects Appraisal Rights For Stockholders Of Merger Parent, Even When Transaction Results In Sale Of Control Over The Surviving Corporation.
On May 25, 2018, Chancellor Andre G. Bouchard dismissed a class action lawsuit brought by stockholders of Dr. Pepper Snapple Group, Inc. (“Dr. Pepper”) against the company and its directors asserting that the merger with Maple Parent Holdings Corp. (“Maple Parent”), the parent company of Keurig Green Mountain, Inc., deprived them of their statutory appraisal rights. City of North Miami Beach General Employee’s Retirement Plan v. Dr. Pepper Snapple Group, Inc., C.A. No. 2018-0227-AGB (Del. Ch. June 1, 2018). Plaintiffs alleged that Dr. Pepper’s directors breached their fiduciary duties, and the corporation violated Section 262 of the Delaware General Corporation Law, when Dr. Pepper filed a proxy statement that informed stockholders that they were not entitled to appraisal rights in connection with the proposed merger.
The challenged transaction was a reverse triangular merger between a merger subsidiary of Dr. Pepper and Maple Parent, whereby Maple Parent stock was to be converted into the right to receive shares of newly issued Dr. Pepper common stock, and Maple Parent would declare a $9 billion cash dividend to Dr. Pepper (which would provide its pre-transaction stockholders with a special cash dividend). The volume of newly issued Dr. Pepper common stock left pre-transaction stockholders with only 13% of the combined corporation, while Maple Parent’s equity holders would own the other 87%. Both the stockholders and Dr. Pepper and its directors moved for summary judgment on the legal question of whether Dr. Pepper’s stockholders were entitled to appraisal rights under Section 262. In granting defendants’ motion for summary judgment, the Court explained that Section 262 does not entitle stockholders of a parent corporation, like Dr. Pepper, to appraisal rights when they would retain all of their shares throughout the transaction.
The Court first noted that Section 262(b) only affords appraisal rights to stockholders of “constituent corporations” in a merger or consolidation. Relying on the construction of Section 262 and Delaware precedent, the Court concluded that constituent corporations are “entities that actually were merged or combined in a transaction and not a parent of such entities.” Accordingly, Dr. Pepper, as the parent corporation in the proposed merger, was not a constituent corporation, and its stockholders therefore had no appraisal rights.
The Court went on to hold that even if Dr. Pepper were a constituent corporation, its stockholders still would not have appraisal rights because Dr. Pepper’s stock was traded on a national exchange (thereby falling under the “market out exception” of Section 262(b)(2)) and the stockholder plaintiffs were never forced to relinquish their shares. Chancellor Bouchard rejected plaintiffs’ arguments, premised on the Court’s ruling in litigation concerning the CVS/Caremark merger, Louisiana Municipal Police Employees Retirement System v. Crawford, 918 A.2d 1172 (Del. Ch. Feb. 23, 2007), that the merger was, in substance, a forced sale of control over Dr. Pepper in exchange for cash consideration. Chancellor Bouchard noted that the appraisal rights afforded by Section 262 are triggered not by a sale of control but by a forced sale of stock “in certain, statutorily specified types of transactions.” This decision further reinforces that the Delaware Chancery Court will not ignore the express terms of Section 262 in order to “surmise the underlying economic and practical effect” of transactions.