In Berger v. Pubco Corp., 2008 WL 2224107 (Del. Ch., May 30, 2008), read opinion here, the Delaware Chancery Court fashioned a "quasi-appraisal" remedy due to a breach of the statutorily mandated requirements of a short-form merger under DGCL Section 253, as well as for breach of the duty to make necessary disclosures.
This is a good primer on the requirements of a short-form merger under Section 253 and what pitfalls to avoid.
First, the opinion began with the court reciting the three basic requirements of a short-form merger:
1. Minority shareholders of the subsidiary must be notified of their rights.
2. Such notice must include a (current) copy of the appraisal statute;
3. The parent corporation has a duty to disclose all material information with respect to the shareholders’ decision whether or not to seek an appraisal remedy.
TWO BREACHES FOUND: First, the faulty notice included what the court described as a "noncurrent" version of the appraisal statute that was provided to the shareholders (yes, it’s true, they attached an old version of the statute), and the court imposed a "strict liability" test for failure to comply exactly with the statutory requirements. Second, the court found that the duty of disclosure was breached for failure to provide all material information.
SPECIFIC DEFICIENCIES IN THE DISCLOSURES: The court found 5 problematic omissions in the disclosures given to the shareholders:
1. No disclosure of the company’s plans or prospects;
2. No meaningful discussion of the company’s actual operations;
3. No disclosure of the company’s finances by division or line of business;
4. No explanation of how assets consisting of substantial cash and securities were utilized or were going to be utilized.
5. No disclosure of how the majority stockholder calculated the price at which he set the merger consideration.
The court explained that the "duty of disclosure" is not a separate and distinct fiduciary duty but rather the court recited its well-settled parameters and prerequisites, as well as observing that its breach in this context gives rise to irreparable injury.
The court, in a fair amount of detail, described the type of financial details that were lacking in the notice provided, and why that was a breach of the duty of disclosure, and why in the context of the particular company involved, the shareholders needed to know in particular how the merger price was set.
QUASI-APPRAISAL REMEDY: After explaining the capacious flexibility that the Chancery Court has in fashioning uniquely-tailored remedies, a four-part quasi-appraisal remedy was ordered:
1. Supplemental disclosures must be made;
2. Minority shareholders must be given a choice to participate in an appraisal proceeding to replicate as much as possible the situation they would have been in had they received proper notice;
3. The "quasi-appraisal proceeding" will be structured to mirror as much as possible the same risk inherent in a conventional appraisal proceeding in which the court may determine that the merger price was actually higher than the price arrived at by the court; and
4. The Order called for a valuation of the company as of the merger date according to the method prescribed by the appraisal statute.
UPDATE: The Delaware Supreme Court decision in 2009 addressing the appeal of this case must be read to determine what parts of this case are still good law.