Short form mergers

1. Short form mergers Chapter 10 - C

2. Short form mergers • Different legal structure – all states have them • Del. 253 • Relax stat requirements if s/h already owns 90% or more of target • Vote requirement empty anyway and is waived • But why should exclusive remedy to minority s/h be appraisal (which it is)?

3. Glassman v. Unocal Exploration Corp. • The parent, Unocal Corporation, same company that gave its name to the Unocal doctrine • History -- A 1937 statute authorized a short form merger with a 100% owned subsidiary, which was extended in 1957 to a 90% owned subsidiary. • This amendment also authorized the use of cash as consideration (before just stock would have been permitted) with the result that a cash‐out was now possible. • This cash option was not extended to long‐form mergers until a few more years went by. • A 1959 opinion upheld the cash out in a short form. • Stauffer (in 1962) said appraisal was exclusive (absent fraud or illegality).

4. Glassman v. Unocal (cont.) • Again short‐form holding preceded a similar holding for long‐form five years later. • But then in Singer v. Magnavox (1977), the Delaware Supreme Court held that using a long form to eliminate the minority shareholders was a breach of fiduciary duties and this was extended to the short form context two years later. • Next in 1983 in the Weinberger case a more liberalized appraisal remedy was set forth and some language suggested it would be exclusive. • But subsequent opinions as to long‐form mergers made clear that fiduciary duty claims continued for self‐dealing transactions, and included §253 short form mergers among those for which there would be a fairness claim. • Thus, this 2001 opinion is another reversal of course in which the court holds the plain words of the statute prevent a fiduciary duty claim. • After half a century we are back to Stauffer.

5. But . . . • look how the Court has modified appraisal. • now includes adjustments if the merger was timed to take advantage of a depressed market price. • The court explicitly notes these are the type of claims raised in an entire fairness claim and notes its prior precedent that unfair dealing cannot be litigated in an appraisal. • The court now limits such holdings to use in awarding of separate recessionary relief in appraisal and is now open to such claims being factored among all relevant factors in defining what fair value is. • The result is to make the appraisal statute more open to self‐dealing claims than it may have seemed before. • Similarly the court affirms that duty of full disclosure is also part of the statutory claim.

6. Berger v. Pubco Corp. • This opinion extends the Glassman debate in a context in which the controlling parent failed to provide full disclosure mentioned at the end of the Glassman opinion. • In the Berger case, the majority’s disclosure had been pretty sketchy in offering minority shareholders $20 for shares that had been trading in the market in the $12‐$16 range. • The Court wants the minority to have all the factual information that is material to the decision of whether to accept appraisal. • The Chancery Court had ruled that there must be a quasi‐appraisal action available for the minority after sufficient disclosure.

7. Berger (cont.) • The Supreme Court expands the remedial alternatives to four. • One, letting the disclosure claim lead to the usual fiduciary duty claim, rejected because it ignores the statute that wanted to limit shareholders to appraisal in the short form setting. • A second, replicating appraisal, rejected because the difficulty this would impose on shareholders in complying with the strict statutory requirements given the passage of time and their current status as strangers to the nominal record holder of the shares. • focus then on two quasi‐appraisal formulations. • These two differ on whether • each shareholder must opt‐in or opt out and • whether they must in effect give back the payments they received because Delaware’s statute provides no payment until the litigation is over and these shareholders had already received payment. • Thus the case comes down to the option and escrow questions.

8. Berger • Court decides that opt out would be more burdensome for the plaintiff but that neither is more burdensome than the other to the corporation, so it chooses opt in • (skipping past the real benefit to the company that appraisal has always had which is that its “perfection requirement greatly limit the fraction of eligible shareholders who pursue appraisal”). • The opt out makes the statutory remedy more like a class action when there has been nondisclosure.

9. Berger • The escrow requirement framed well by Gilliland decision at chancery • “to mimic, at least in small part, the risks of a statutory appraisal…and to avoid awarding a ‘windfall; who made an informed decision” originally but now have a second bite at the apple with the knowledge of how the markets and other factors have evolved. • The court again opts to put the risk on the company that failed to satisfy its duty of disclosure. • The cost of such a breach is forfeiting statutory right to retain merger proceeds. • The reasoning is a “good for the goose, good for the gander” type of justice.

10. Berger • There are many, many cases where minority shareholders have lost their appraisal rights by their failure to strictly satisfy one or more of the requirements of perfection (e.g. not voting in favor of the merger, submitting their shares to the corporation, filing suit within the applicable time period). • Many of these came in the period of arm’s length mergers where the legislature and the courts were seeking to limit use of appraisal in such a setting, but some of these holdings have carried over to disadvantage minority shareholders who have been forced out of the corporation against their will. • This offsetting imposing of penalties may be rough justice, but it is another illustration of how out of touch Delaware’s merger statute is to current realities.