Minority shareholders, meaning those whose shares in a corporation make up only a small percentage of the total outstanding shares, are at a disadvantage if one or more majority shareholders take actions that harm their interests. State business and corporate laws offer protection against certain potentially harmful actions by the majority. In the event of a merger, for example, minority shareholders can challenge the valuation of the corporation and the resulting price per share that they would receive. The Delaware Court of Chancery recently considered a shareholder’s claim that he did not receive sufficient information to evaluate and object to a planned merger. In Re United Capital Corp., Stockholders Litigation, No. C.A. No. 11619-VCMR, mem. op. (Del. Ch., Jan. 4, 2017).
A “merger,” generally speaking, involves two companies combining to form a single company. Delaware allows a procedure known as a “short-form merger,” which typically involves a parent company merging with a subsidiary. Since the parent company, by definition, owns a majority of the subsidiary’s stock, the merger only requires buying the shares of the minority shareholders. A short-form merger can also occur when one shareholder owns an overwhelming percentage of outstanding shares and wants to buy out the minority shareholders. Shareholder approval is not required for this type of merger. See 8 Del. Code § 253. This was the type of merger that led to the dispute in United Capital.
Minority shareholders who believe their shares have been undervalued in a short-form merger have little legal recourse. The Delaware Supreme Court has held that “absent fraud or illegality, the only recourse for a minority stockholder who is dissatisfied with the merger consideration is appraisal.” Glassman v. Unocal Expl. Corp., 777 A.2d 242, 243 (Del. 2001). This involves “an appraisal by the Court of Chancery of the fair value of the stockholder’s shares of stock” under the circumstances of a merger. 8 Del. Code § 262.
If a minority shareholder believes they have not received enough information to establish a legal claim for appraisal, the remedy of “quasi-appraisal” allows a court “to place those stockholders in the position they would have been in but for the board of directors’ inadequate disclosure of material facts.” Berger v. Pubco Corp., et al., C.A. No. 3414-CC, mem. op. at 12 n. 27 (Del. Ch., May 30, 2008), quoting Arnold v. Soc’y for Sav. Bancorp, Inc., C.A. No. 12883, mem. op. (Del. Ch., Jun. 15, 1995).
The majority shareholder in United Capital owned about 94% of the corporation’s outstanding stock. He sought to buy out the minority shareholders in a short-form merger, eventually agreeing to pay $32 per share. The plaintiff, a minority shareholder, received written notice before the merger was to become effective. The notice included financial statements, a financial analysis, information about the merger, and a statement indicating potential conflicts of interest.
The plaintiff filed suit against the corporation and the majority shareholder, seeking quasi-appraisal on the ground that he lacked sufficient information to make a claim for appraisal. The court granted the defendants’ motion to dismiss, finding that the defendants met their duty of disclosure and that the plaintiff did not “allege adequately that the omitted information is material to the decision to seek appraisal.” United Capital at 1. It held that the plaintiff’s only available remedy is appraisal.
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