In the case of In Re: PNB Holding Co. Shareholders Litigation, read opinion here, the Chancery Court, in a 76-page opinion conducts a thoughtful analysis of many merger-related issues which time and space will only allow me to identify in brief.
This case addressed both equitable claims and an appraisal under DGCL Section 262 in connection with a merger that had the effect of reducing the number of shareholders from approximately 300 to less than 75 in order to qualify for a conversion to an S Corporation. The court allowed the equitable claims to be prosecuted by those who did not vote for the merger but who accepted the merger consideration. The court found that as long as they did not vote for the merger, the acceptance of the merger consideration did not amount to waiver by acquiescence.
The court determined that the entire fairness standard applied because the directors were not independent to the extent that their personal gain from the transaction was not shared by all shareholders. However, the court determined that the case of Kahn v. Lynch, 638 A.2d 1110 (Del. 1994), which applies to a controlling stockholder merger, did not apply. The plaintiffs attempted to argue that the shares owned by the directors and their families should be considered a controlling group, but the court was not convinced. Although the court recognized that a shareholder or group of shareholders can be considered controlling under certain circumstances, even if they own less than 50%, and the court discussed cases so holding, the facts of this case do not support such a conclusion.
The court also observed that despite the directors being conflicted, and therefore bound to demonstrate that the merger was fair to the departing stockholders, they failed to use any “cleansing device” such as: (1) approval by a special committee of independent directors, or (2) an informed “majority of the minority” vote, which might otherwise allow the transaction to benefit from the deferential business judgment rule. The court reviewed the disclosure claims by the plaintiffs but rejected them. The court also discussed what it viewed as imperfections (my word) in the applicability of the Lynch case, supra, to controlling shareholders transactions when cleansing devices are applied.
A thorough analysis of the expert valuations was discussed, and the court relied, among other things, on the iconic valuation treatises of Shannon Pratt, at footnote 105, for its determination that the price paid in the merger was too low. Those plaintiffs who were making equitable claims were given the difference between the consideration they received and the higher value determined by the court.