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Short form mergers. Chapter 10 - C. 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 - PowerPoint PPT Presentation


Short form mergers

Short form mergersChapter 10 - CShort form mergersDifferent legal structure all states have themDel. 253Relax stat requirements if s/h already owns 90% or more of targetVote requirement empty anyway and is waivedBut why should exclusive remedy to minority s/h be appraisal (which it is)?GlassmanJuly 25, 2001, the Delaware Supreme Court, sitting en banc Important issue resolved: fiduciary duty of a controlling shareholder to establish the entire fairness of a "short-form," "freeze out," or "squeeze out" merger pursuant to Section 253 of the Delaware General Corporation Law. Section 253 authorizes a corporation that owns at least 90 percent of the shares of each class of the stock of a subsidiary to merge the subsidiary into the controlling shareholder simply "by executing, acknowledging and filing... a certificate of such ownership and merger setting forth a copy of the resolution of its board of directors to so merge and the date of the adoption."[NB: normal protections to minority s/h under 251 not in place]

GlassmanThe court acknowledged the controlling shareholder's "seemingly absolute duty to establish the entire fairness of any self-dealing transaction" and past decisions by the court (not involving short-form mergers pursuant to Section 253) that have "described entire fairness as the 'exclusive' standard of review in a cashout, parent/subsidiary merger.The court held, however, that Section 253 "authorizes the elimination of minority stockholders by a summary process that does not involve the 'fair dealing' component of entire fairness.As a result, "a parent corporation cannot satisfy the entire fairness standard if it follows the terms of the short-form merger statute without more."GlassmanThe court elaborated as follows: Under settled [common law] principles, a parent corporation and its directors undertaking a short-form merger are self-dealing fiduciaries who should be required to establish entire fairness, including fair dealing and fair price.The problem is that 253 authorizes a summary procedure that is inconsistent with any reasonable notion of fair dealing.In a short-form merger, there is no agreement of merger negotiated by two companies; there is only a unilateral act-a decision by the parent company that its 90% owned subsidiary shall no longer exist as a separate entity. The minority stockholders receive no advance notice of the merger; their directors do not consider or approve it; and there is no vote. Those who object are given the right to obtain fair value for their shares through appraisal.

GlassmanThe equitable claim plainly conflicts with the statute.If a corporate fiduciary follows the truncated process authorized by 253, it will not be able to establish the fair dealing prong of entire fairness. If, instead, the corporate fiduciary sets up negotiating committees, hires independent financial and legal experts, etc., then it will have lost the very benefit provided by the statute-a simple, fast and inexpensive process for accomplishing a merger.GlassmanDE Sup Ct resolves conflict by giving effect to intent of General Assembly253 must be construed to obviate the requirement to establish entire fairness.The parent corporation does not have to establish entire fairness, and absent fraud or illegality, the only recourse for a minority stockholder who is dissatisfied with the merger consideration is appraisal.Absent fraud or illegality, appraisal thus "is the exclusive remedy available to a minority stockholder who objects to a short-form merger."GlassmanThe court emphasized, however, that "[a]lthough fiduciaries are not required to establish entire fairness in a short-form merger, the duty of full disclosure remains.Minority shareholders are entitled to decide whether to accept the merger consideration or seek appraisal, and "must be given all the factual information that is material to that decision.The court also noted that the determination of fair value in an appraisal proceeding "must be based on all relevant factors, including damages and elements of future value, where appropriate." Thus, for example, if a merger is "timed to take advantage of a depressed market, or a low point in the company's cyclical earnings, or to precede an anticipated positive development, the appraised value may be adjusted to account for these factors."GlassmanThe court acknowledged that "these are the types of issues frequently raised in entire fairness claims," and that "we have held that claims for unfair dealing cannot be litigated in an appraisal.The court, however, stated that these "prior holdings simply explained that equitable claims may not be engrafted onto a statutory appraisal proceeding," and thus "stockholders may not receive rescissionary relief in an appraisal.These decisions, the court continued, "should not be read to restrict the elements of value that properly may be considered in an appraisal.(if you say so . . . )

Glassmancontrolling shareholders need not establish the entire fairness of a short-form merger, but must disclose all material facts required for minority shareholders to determine whether to accept the merger consideration or to seek an appraisal of fair value. If an appraisal is sought, it will be based on all elements of value.

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 majoritys 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 quasiappraisal action available for the minority after sufficient disclosure. Berger v. Pubco Delaware Supreme Court Holdinga quasi-appraisal remedy is an appropriate remedy in a short form merger where the greater than 90 percent stockholder breached its duty to disclose material information to the minority stockholders.reversed the Delaware Court of Chancerys form of quasi-appraisal remedy and instructed the Court of Chancery to enter a quasi-appraisal remedy that includes all minority stockholders (except those that opt out) and to not require any minority stockholders to escrow a portion of their previously received merger consideration.BergerPubco Corporation (Pubco or the company) is a Delaware corporation whose shares of common stock were not publicly traded. More than 90 percent of Pubcos shares were owned by defendant Robert H. Kanner, who was Pubcos president and sole director. The plaintiff, Barbara Berger, was a Pubco minority stockholder.

BergerKanner decided that Pubco should go private via a short form merger under Section 253 of the Delaware General Corporation Law (the DGCL).Because that short form procedure is available only to corporate controlling stockholders, Kanner formed a wholly owned subsidiary, Pubco Acquisition, Inc. (Acquisition) and transferred his Pubco shares to that entity to effect the merger.When the merger took place, on October 12, 2007, Pubcos minority stockholders received $20 cash per share. The only relevant corporate action required to effect a short term merger under Section 253 is for the board of directors of the parent corporation, in this case Acquisition, to adopt a resolution approving a certificate of merger and to furnish the minority stockholders with a notice advising that the merger has occurred and that they are entitled to seek an appraisal under Section 262 of the DGCL. Section 253 required that the notice include a copy of the appraisal statute, and Delaware case law required that Acquisition disclose in the notice of merger all information material to stockholders deciding whether or not to seek appraisal.

BergerIn November 2007, Berger received a written notice from Pubco advising that Pubcos controlling stockholder had effected a short form merger and that Berger and the other minority stockholders were being cashed out for $20 per share. The Notice explained that stockholder approval was not required for the merger to become effective and that the minority stockholders had the right to seek an appraisal. The Notice disclosed some information about the nature of Pubcos business, the names of its officers and directors, the number of its shares and classes of stock, a description of related business transactions and copies of Pubcos most recent interim and annual unaudited financial statements. also disclosed that Pubcos stock, although not publicly traded, was sporadically traded over the counter, and that in the nearly two years preceding the merger there were 30 open market trades that ranged in price from $12.55 to $16 per share, at an average price of $13.32.

Bergerthe Court of Chancery found that the disclosures in the Notice provided no significant detail regarding Pubco, its future or the determination of the merger price, with the exception of the financial statements. Notice included a description of the Company and its business, which was only five sentences long and featured otherwise vague statementsfor instance, that [t]he Company owns other income producing assets.The Delaware Supreme Court further noted that the Notice did not include any disclosure regarding Pubcos plans or prospects, nor any meaningful disclosure regarding Pubcos actual operations or of its finances by division or line of business. Del Sup Ct noted financial statements indicated that Pubco held a sizeable amount of cash and securities but failed to explain to the minority stockholders how those assets were, or would be, utilized.Notice did not disclose how Kanner had determined the $20-per-share merger price. As required by law, the Notice did attach a copy of the appraisal statute, bu