In Re Sunbelt Beverage Corp. Shareholder Litigation, Consol. C.A. No. 16089-CC (Del. Ch., Jan. 5, 2009), read opinion here.

Kevin Brady, a highly regarded Delaware litigator, provided this synopsis.

The Court  of Chancery in this opinion addressed a consolidated breach of fiduciary duty and appraisal proceeding arising out of a 12-year old cash-out merger of SBC with and into Sunbelt Beverage Corporation. Plaintiff Goldring alleged that Sunbelt’s board of directors violated their fiduciary duties in cashing her out at an unfair price, for which she sought rescissory relief or in the alternative, an appraisal of her shares of Sunbelt stock, plus interest, costs, expert fees and attorneys’ fees.

In 1997, Goldring held approximately 14.9% of the shares of Sunbelt stock. Sunbelt formerly was a division of McKesson Corporation that in 1988 began to divest its wine and spirits operations. McKesson approached Ray Herrmann, the former Vice-Chairman of McKesson Wine & Spirits, to see if he would be interested in purchasing McKesson Wine & Spirits. Herrmann organized a group of investors, including investment funds from the private investment firm of Weiss, Peck, and Greer (“WPG”), to purchase McKesson Wine and Spirits.

In 1997, McKesson and WPG sold their last remaining shares of Sunbelt stock. Sunbelt’s board convened a week later, on August 6, 1997, to discuss a proposed business alliance with Young’s Market. Before the conclusion of the meeting, the board authorized Sunbelt to obtain a fairness opinion for a $45.83 per-share offer for Goldring’s stock. After a week’s work on the project, Hempstead & Co. had completed its valuation of Sunbelt and prepared a fairness opinion for a proposed Sunbelt stock transaction at $45.83 per share. On December 12, 1997, Goldring filed her appraisal action in Delaware but the action was stayed while an arbitration proceeding went forward in New York. Following the conclusion of the arbitration, the stay was lifted and Goldring’s appraisal action and her common law breach of fiduciary duty action proceeded in Delaware.

At trial in April 2009, Goldring’s expert valuations were: (i) a discounted cash flow analysis ($114.04 per share); and (ii) a comparable transactions analysis ($104.16 per share). Defendants’ expert’s valuations were: (i) a discounted cash flow analysis ($36.30 per share); (ii) an analysis of earlier transactions involving Sunbelt stock ($45.83 per share); and (iii) an asset based approach ($42.12 per share).

The Court found that the defendants failed to show any semblance of a fair process with respect to the merger. The Court found that the defendants failed in meeting their burden of demonstrating that the merger was entirely fair, as they did not use “any of the procedural devices that could temper … the application of the entire fairness standard, such as a special negotiating committee of disinterested and independent directors or a majority-of-the-minority stockholder vote provision.” Moreover, the merger included “no procedural protections designed to ensure arm’s-length bargaining or to approximate a fair valuation procedure. There was no special committee, no opportunity for genuine negotiations regarding the merger consideration, and no dissemination of material information that would level the playing field and prevent Goldring from becoming a drastically disadvantaged minority shareholder.” However, the Court found that rescissory damages were not appropriate because of “significant issues related to complexity and implementation…” The company’s portfolio was “too complex to unscramble and, ultimately, rescission is an equitable remedy that a court of equity will only grant, as an exercise of discretion, when that remedy is clearly warranted.”

Turning to the appraisal action, the Court focused on the fact that the defendants obtained a “highly suspect” fairness opinion for the proposed merger consideration of $45.83 because the opinion was produced in approximately one week (during which time, the lead appraiser for Hempsted was working on at least one other matter that precluded him from working extensively and meaningfully with Sunbelt representatives). As a result, the Court followed Goldring’s expert and awarded $114.04 per share in money damages as an adequate substitute remedy.

With respect to Goldring’s request for fees and costs, the Court determined that the equitable result would be for defendants to pay Goldring’s court costs and expert witness fees which amounted to over $840,000. The Court rejected her request for attorneys’ fees because in order to shift fees, the Court had to find bad faith on the part of defendants which the Court could not find here. The Court also awarded interest at the legal rate (5% greater than the Federal Reserve discount rate as measured during that period of time), compounded quarterly.