Alexandra D. Rogin, an Eckert Seamans associate, prepared this overview.
In the Court of Chancery’s opinion styled, In re United Capital Corp. Stockholders Litigation, C.A. No. 11619-VCMR (Del. Ch. Jan. 4, 2017), the plaintiff sought a quasi-appraisal remedy for purported breaches of disclosure in connection with a short-form merger transaction. In granting the defendants’ motion to dismiss, the Court outlined the general requirements necessary to provide adequate notice to minority stockholders under such circumstances.
Background: The lead plaintiff (“Plaintiff”) owned shares of common stock in the defendant company, United Capital Corporation (the “Company”). The Company is involved in real estate investment and management, and it also manufactures engineered products.
The individual defendants, A.F. Petrocelli, Howard Lorber, Arnold Penner, Anthony J. Miceli, Michael T. Lamoretti, Michael J. Weinbaum, and Robert Mann held director and/or officer positions within the Company. Most also held distinct director and/or officer positions within other companies, for example, Hallman & Lorber Associates, Inc. (“H&L”), which provided pension plan services to the Company for the 2010 fiscal year.
On June 22, 2015, Petrocelli submitted an initial bid letter to the Board of the Company, offering to purchase the minority shares of the Company for $30 per share. The Board formed a special committee consisting of Lorber, Mann, and Penner to review the offer. The special committee reviewed financial and other pertinent information before countering Petrocelli at $35 per share. After continued negotiations, the special committee approved the proposed merger at a price of $32 per share, determining that the price “was fair and in the best interests of the Company and its stockholders.”
On August 24, 2015, the Company entered into a Merger Agreement with A.F. Petrocelli LLC (“Parent”) and A.F. Petrocelli Acquisition Co., a wholly-owned subsidiary of Parent (“Merger Sub”). Petrocelli then transferred his original interest in the Company to Merger Sub. On the date the merger was announced, the Company was trading at $39 per share, $7 more than the merger price.
On September 3, 2015, Plaintiff received written notice of the merger from the Company (the “Notice”), which included financial statements, management’s analysis of the Company’s financial status, the background of the merger, and potential Board and special committee conflicts. On October 16, 2015, Plaintiff filed the present action on behalf of the public minority stockholders of the Company, which was later consolidated with a class action arising out of the same transaction, seeking a quasi-appraisal remedy.
Parties’ Arguments: Plaintiff argued that the Notice did not properly disclose the controller’s reasoning behind the merger price, the special committee’s process, financial projections used to determine company valuation, information regarding working capital and future cash use, the lack of an independent special committee, and the identities of two directors and a director’s spouse who participated in a multi-million dollar note with the Company. Defendants moved to dismiss the Complaint, arguing that all material information was disclosed, and furthermore, that any information omitted was not material.
Court’s Analysis: The Court granted the motion to dismiss, as Plaintiff did not adequately allege that the omitted information was material to the decision to seek appraisal, and the duty of disclosure was not violated. The Court explained that a parent corporation need not establish entire fairness with transactions occurring under 8 Del. C. § 253, which applies to transactions involving short-form mergers, as is the case with the present action. Despite § 253, the duty of full disclosure remains, which requires that the Company notify the minority of the availability of appraisal rights and provide information material to the determination of whether to seek appraisal. Information is material if there is “a substantial likelihood that the undisclosed information would significantly alter the total mix of information already provided.” Absent fraud or illegality, though, the only recourse for a minority stockholder dissatisfied with the merger consideration is appraisal.
The Court found that the Company’s eighty-page Notice provided comprehensive information regarding the background of the merger and the business and financials of the Company, including in-depth discussions of financial statements, real estate investments, lease agreements, hotel operation information, and information regarding the Company’s engineered products. This information gave Plaintiff the minimum that was necessary to determine whether he could “trust that the price offered is good enough,” or whether the price undervalued the Company “so significantly that appraisal is a worthwhile endeavor.”
Conclusion: Ultimately, the Court determined that Plaintiff’s alleged omissions were not material to the decision of whether to seek appraisal in light of the abundant disclosures already provided. Specifically, the Notice adequately disclosed: (1) the necessary information regarding the special committee’s determination of a fair price; (2) Petrocelli’s reasoning behind his offer price; (3) sufficient current, historical, and forward-looking financial data; (4) the Company’s cash, cash equivalents, and their future use; (5) a discussion of the independence of Lorber and Penner; and (6) certain directors’ potential conflicts.
Thus, because Plaintiff failed to allege fraud, illegality, or a disclosure violation, the only available remedy was appraisal. Therefore, the Court granted Defendants’ motion to dismiss the Complaint seeking a quasi-appraisal remedy.