In Berger v. Pubco Corp., Del. Supr., (July 9, 2009), read opinon here, the Delaware Supreme Court clarified Delaware law regarding the remedy for minority shareholders in a "short form" merger under DGCL section 253 when the minority shareholders are not given material information.
Marcus Montejo, a Wilmington lawyer in the Prickett Jones firm, which is the firm that prevailed in the case, provides us with the following overview of the case:
Yesterday, the Delaware Supreme Court announced for the first time the appropriate operation of a quasi-appraisal remedy when a fiduciary has failed to observe his duty of disclosure in a short-form merger. In Berger v. Pubco Corp., the court ruled that where there is a breach of the duty of disclosure in a short form merger, a quasi-appraisal remedy does not require the minority stockholders to “opt-in” or escrow a portion of the merger proceeds they received. As a result of yesterday’s ruling, minority stockholders squeezed-out in a short form merger will automatically become members of a class when the majority stockholder has failed to observe his duty of disclosure.
In ruling so, the court rejected the Gilliland “opt-in” procedure. The court reasoned that whether the minority stockholders opted-in or opted-out of a class made no difference to the corporation. Either way the corporation would know early on who was a member of the class. By contrast, an opt-in procedure was more burdensome than opting-out for the minority stockholders and risked forfeiting the opportunity to seek an appraisal recovery. Accordingly, the court found an opt-out procedure optimal.
The court also rejected the Gilliland escrow procedure. Although the court agreed with the corporation that the minority stockholders would enjoy the “dual benefit” of retaining the merger proceeds and at the same time litigating to recover a higher amount, the court concluded that from a fiduciary’s standpoint, this was not an inequitable result.
Importantly, the court noted that a corporation must be held to the same strict standard of compliance and that the appraisal statute must be construed even-handedly. To this end, the court explained that “minority shareholders who fail to observe the appraisal statute’s technical requirements risk forfeiting their statutory entitlement to recover the fair value of the shares. In fairness, majority stockholders that deprive the minority shareholders of material information should forfeit their statutory right to retain the merger proceeds payable to shareholders who, if fully informed, would have elected appraisal.”