Mehta v. Smurfit-Stone Container Corp., C.A. No. 6891-VCL (Del. Ch. Oct. 20, 2014).  This case is noteworthy for its description of the measure of damages that are potentially available for a stockholder who is wrongfully denied shares.

Background: This decision involves stockholders who initially made a demand for statutory appraisal rights in connection with a merger. The merger that is part of the background of this case, followed a plan of reorganization approved by the Bankruptcy Court in connection with a prior Chapter 11 bankruptcy proceeding of the company. The confirmation order of the Bankruptcy Court discharged and released all claims against the company and its directors relating to the bankruptcy. Shortly after the bankruptcy, the company merged. Pursuant to the merger, each share of the company’s common stock was converted into the right to receive a combination of cash, as well as a number of shares in the new company. See previous court decision in 2011 by the Delaware Court of Chancery involving this company and merger related litigation, highlighted on the pages.

The stockholders in this case made a timely demand for appraisal through their broker, and therefore did not receive the merger consideration. However, they did not complete the prerequisites for perfecting their statutory appraisal rights because they never filed a formal petition for appraisal. No other stockholder filed an appraisal either. The 120-day time period during which at least one stockholder must file an appraisal petition for an appraisal proceeding to move forward, came and went on September 24, 2011. Thereafter, the stockholders in this case withdrew the initial demand for an appraisal. After withdrawing their appraisal demand, they consistently argued and requested their right to receive the merger consideration.

The company refused to provide the merger consideration unless the stockholders agreed to broader settlement terms and other demands that the stockholders did not consent to, and therefore the company never provided the merger consideration to the stockholders in this case.

As a result the stockholders initiated this case alleging claims for breach of fiduciary duty. After a somewhat unexplained procedural delay, a motion to dismiss under Rule 12(b)(6) was briefed and oral argument was heard on September 15, 2014.

The court reviewed the relevant standard under a motion to dismiss and found that some claims were barred by the bankruptcy confirmation order which released bankruptcy related claims.

Highlights: Although the court found that there was no applicable fraud exception to the continuous ownership requirement for a derivative claim, the court found that there was a claim against the company due to the failure of the company to provide merger consideration to the stockholders in this case because after the effective date of the merger passed, and no stockholder filed a petition for appraisal by that deadline, the right to appraisal lapsed for all stockholders who had previously demanded appraisals. That triggered an obligation on the part of the surviving corporation to pay the merger consideration. Because that merger consideration was never paid, a stockholder has a claim to recover it. See Section 262(d)(1) of the Delaware General Corporation Law. See Section 262(e) regarding the deadlines within which a stockholder can withdraw an appraisal demand without the consent of the corporation. Compare also the deadline after which time the consent of the corporation is needed.

The claim against the corporation by the stockholders in this case could be framed as either a breach of contract or one for unjust enrichment.

Scope of the Remedy and Measure of Damages: The court explained that on a breach of contract claim, a plaintiff can only recover consequential damages if the damages were foreseeable at the time of the contract. Consequential damages are defined as those that do not flow directly or immediately from the breach. The court reasoned that those types of damages were not available in this case because that part of the relief requested was not reasonably foreseeable.page2image26208page2image26368 

The court described the remedy for the failure to provide the stock portion of the merger consideration as “more difficult and will require input from the parties if this case reaches the remedial stage.”

The court further explained that:

One method would be to convert the stock component into a cash value based on the trading price of the shares on the date when payment was due and bring that amount forward with interest. Another method would be to award the value of the shares at the time of judgment, including intervening splits and dividends. Both of these approaches, however, select arbitrary points for valuing the shares. A third possibility would be to recognize that if the [stockholders] had received the stock component when it was due, they [the stockholders] would have had the ability to sell at a time of [their] own choosing during the period after September 25, 2011 [the date the stock should have been issued], until the date of judgment. In other situations where a party has a right to sell and the defendant has foreclosed the plaintiff from exercising that right, the law awards the plaintiff the highest intermediate value of the shares. See Duncan v. TheraTx, 775 A.2d 1019, 1023 (Del. 2001); Paradee v. Paradee, 2011 WL 3959604, at *13 (Del. Ch. 2010); Am. Gen. Corp. v. Continental Airlines Corp., 622 A.2d 1, 10 (Del. Ch. 1992).

Slip Op. at 14-15.

In sum, the court allowed the claim for nonpayment of merger consideration to proceed and noted that other remedial issues regarding any damages due would be confronted at a later time in the case.