Roam-Tel Partners v. AT&T Mobility Wireless Operations Holdings, Inc., C.A. 5745-VCS (Del. Ch. Dec. 17, 2010), read opinion here.
The Court of Chancery in this 32-page decision decided an issue of first impression. The Court addressed whether a demanded appraisal within the statutorily prescribed 20 day election period provided for in 8 Del. C. Section 262(d)(2) is valid when the minority shareholder initially waived its statutory right and revoked its tender but then returned an uncashed check. Short answer: Yes.
Short Summary of Holding
After a careful analysis regarding the statutory scheme for appraisal rights in a short-form merger and a review of public policy and case law history on the topic, the Court reasoned that:
“Where a minority stockholder perfects its right to an appraisal within the statutory election period and does not accept the merger consideration in the sense that it does not exercise dominion over that merger consideration, that stockholder is entitled to participate in an appraisal action notwithstanding the fact that it made a previous, but promptly revoked, waiver of such right to an appraisal. Absent actual or other prejudice to the surviving corporation, the appraisal statute is best implemented giving stockholders the full 20-days to decide whether to demand appraisal.”
Brief Factual Background
A short-form merger pursuant to 8 Del. C. Sections 228 and 253 was implemented with AT&T Mobility cashing out the minority shareholder. Of the 15 minority stockholders seeking to prosecute the appraisal action, AT&T Mobility objected to the inclusion of only one, ARAP Partners. Roam-Tel filed the appraisal action and made the arguments on behalf of ARAP.
When AT&T Mobility denied the request of ARAP for contact information for other minority shareholders to find out which other minority shareholders were contemplating an appraisal action, ARAP initially determined that it “had no alternative” but to accept the merger consideration. However, it shortly thereafter changed its mind. One of the representatives of the minority stockholders on the board told ARAP about plans for an appraisal action and shortly thereafter ARAP had sent its stock certificate to AT&T Mobility, along with its election to accept the merger consideration. However, ARAP mailed a letter to AT&T Mobility two days before the deadline for making a timely appraisal demand and informed AT&T Mobility of its demand for an appraisal.
In addition, on the deadline for making a timely appraisal demand, ARAP sent via overnight mail the uncashed check for the merger consideration, returning it to AT&T Mobility. It is noteworthy that pursuant to Section 262(d)(2) the date for purposes of determining a timely demand is the date on which the demand is mailed by the minority stockholder (as compared to receipt by the company).
An appraisal action was timely filed on August 18th, seven days after the deadline for making an appraisal demand. The procedural posture of this decision was a ruling on a motion by Roam-Tel to determine the members of the appraisal class (approximately one month after the appraisal was filed), urging the inclusion of ARAP in the class.
Summary of Legal Analysis
The Court described this case as presenting a “novel question”. Section 262(d)(2) of the DGCL “requires that in a short-form merger, ‘any minority stockholder who desires appraisal must submit a written demand to the surviving corporation within 20 days after mailing of a statutorily required notice. The statute does not, however, indicate whether a stockholder may change her mind during that 20-day period.’”
A). Perfecting the Right to an Appraisal in the Short Form Merger Context
Section 253 of the DGCL permits a parent corporation holding at least 90% of a subsidiary corporation’s shares to eliminate the minority stockholder “without notice, vote, or other and traditional indicia procedural fairness.” Absent fraud of other legality, a dissenting minority stockholder’s exclusive remedy is a statutory appraisal under 8 Del. C. Section 262. The statutory scheme set forth in Section 262 requires that the minority stockholder seeking to invoke appraisal perfect its right following the procedure set forth in the statute. Section 262(d)(2) describes the procedure by which the minority stockholders in a short form merger consummate and under Section 253 may perfect their statutory rights of an appraisal. The text accompanying footnotes 26 through 30 of the opinion describe that procedure in detail.
The Court also recognizes practical difficulty and the economic constraints that arise in connection with perfecting the rights to an appraisal which does not grant any immediate financial advantage to the demanding stockholder. As a practical matter, only those with substantial financial means can bare the cost of prosecuting an appraisal that often lasts for several years. See article cited at footnotes 31 and 32 suggesting a reform of the statute. The Court observed that after an appraisal petition has been filed, beyond the initial 60-day period following the merger’s effective date, any withdrawal of an appraisal petition requires both the consent of the corporation and the approval of the Court. See footnotes 35 and 36.
B). Court Rejects Arguments of AT&T Mobility
One by one, the Court rejected the arguments of AT&T Mobility in their attempt to exclude from the appraisal class the demand of ARAP. The first argument was a contractual one and in explaining why the initial acceptance of the merger consideration was not an enforceable contract, the Court explained that the corporation was fulfilling a statutory obligation. Moreover: “A promise to do what one is legally obligated to do . . . is not valid consideration.” See footnote 38.
Next, the Court explained that because the surviving corporation does not “offer” the minority stockholders anything by informing them of their statutory rights; they are statutorily obligated to notify and give minority stockholders the chance to demand an appraisal. Therefore, because there is no consideration for ARAP’s alleged promise to accept the merger consideration to the exclusion of making a statutory demand, there was no valid contract.
The next argument rejected was in connection with the need to possess the stockholder certificate in order to perfect appraisal rights. The Court reasoned that “the only way to make sense of the statute – the statute that expressly provides appraisal rights to minority stockholders in the wake of a short form merger – is to read the term ‘stockholder’ in a case like this one where the effect of the short form merger was to cancel immediately the shares of the minority investors, as excluding those stockholders of record who held shares immediately before the effective date of the short form merger.
That is, the key requirement for the purposes of making an appraisal demand is not that a stockholder making a demand physically possess the stock certificate, but is instead that the stockholder was a record owner of the shares for which he is making a appraisal demand on the last day anyone could have been a record owner of those shares and did not later purport to sell his statutory right to accept the merger consideration or seek appraisal.” See footnotes 52 through 54 and accompanying text.
C). Waiver v. Estoppel
The final argument that the Court rejected was that ARAP irrevocably waived its statutory rights of appraisal when it submitted its stock certificate in exchange for a check representing the merger consideration. The Court explained that AT & T was confusing equitable doctrines in an inequitable way.
This part of the opinion includes all anyone ever wanted to know about the difference between waiver and estoppel, two equitable doctrines that are often confused. The Court even discusses at page 23 the metaphysical issues relating to waiver. Any scholar interested in the practical and theoretical differences between waiver and estoppel could scarcely hope for a more thorough analysis than is found at pages 19 to 22 of the slip opinion, including citations to cases from 1805, as well as learned treatises. For example, the Court recognized the basic principle that “where a party waived a right but promptly revokes it without a detriment to the receiving party, the Courts have generally allowed the party to change their mind.” See cases cited at footnotes 72 and 73, including scholarly commentary.
The best way to explain the distinction between the two equitable doctrines is as follows: “A waiver can be retracted before the other party has materially changed its position in reliance thereon, but once it is established that an estoppel exists, the waiver cannot be revoked.” See footnotes 76 and 77 and accompanying text.
D). Analogous to Proxy Voting
The Court analogized the situation involved with allowing a stockholder in a long-form merger to change its “yes” proxy or consent to “no” before the final vote. The Court referred to the right that a stockholder may have to an appraisal in an ordinary long-form merger effected under Section 251 of the DGCL.
Unlike the context of a short-form merger, stockholders in a long-form merger are typically given far more than 20 days to make the decision about seeking an appraisal, and also enjoy far greater access to information regarding the merger. In addition, in order for a dissenting stockholder to perfect his appraisal rights in the case of a long-form merger, he must either vote against the merger or not vote at all and submit a written demand for an appraisal to the corporation before the stockholder vote. A stockholder is not precluded from changing his mind and altering or revoking his proxy or written consent so long as he does so before the day of the actual vote. See footnote 99.
Moreover, a stockholder in a long-form merger who has previously indicated his approval of the proposed merger by way of a proxy of written consent is not precluded from seeking an appraisal so long as by the date of the actual vote that stockholder’s vote by proxy or written consent is in the negative, and the stockholder has delivered its written demand for an appraisal to the corporation. In the short-form merger context, the election period is 20-days, but in both cases, the stockholder is given a period of time in which to elect to pursue and appraisal.
In sum, the Court concluded that a stockholder who waives its right to an appraisal and is sent the merger consideration may rescind that waiver and perfect its right to an appraisal if: (i) “the demand is made within the statutory election period; and (ii) the minority stockholder does not actually accept the merger consideration in the sense of exercising dominion over the funds." Therefore, the motion to determine the members of appraisal class was granted and ARAP was included in the appraisal class along with the other petitioners whose status was not contested.