Berger v. Pubco Corporation

Supreme Court of Delaware
976 A.2d 132 (2009)

ELI5:

Rule of Law:

When a controlling stockholder breaches the fiduciary duty of full disclosure in a short-form merger, the appropriate remedy is a quasi-appraisal structured as an opt-out class action in which minority stockholders are not required to escrow any portion of the merger consideration they received.

Facts:

Robert H. Kanner owned over 90% of Pubco Corporation's shares and was its president and sole director.
Barbara Berger was a minority shareholder in Pubco.
Kanner decided to take Pubco private, forming a shell subsidiary to execute a 'short-form merger' under 8 Del. C. § 253.
On October 12, 2007, the merger was completed, and Pubco's minority stockholders, including Berger, were involuntarily cashed out for $20 per share.
Following the merger, Pubco sent a notice to the minority shareholders.
The notice failed to disclose the methodology Kanner used to determine the $20 per share merger price.
The notice also included an outdated and incorrect version of the Delaware appraisal statute.

Procedural Posture:

Barbara Berger filed a class action lawsuit against Pubco and Robert H. Kanner in the Delaware Court of Chancery on behalf of all cashed-out minority stockholders.
The parties filed cross-motions for summary judgment.
The Court of Chancery, a trial court, found that the defendants had violated their disclosure duties.
The court fashioned a 'quasi-appraisal' remedy that required minority shareholders to affirmatively 'opt-in' to the action and to escrow a portion of the merger consideration they had received.
Berger, the plaintiff-appellant, appealed the remedial portion of the trial court's order to the Supreme Court of Delaware, the state's highest court.

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Issue:

In a short-form merger where a controlling stockholder violates the fiduciary duty of disclosure, does Delaware law permit a remedy that requires minority stockholders to affirmatively 'opt-in' to a quasi-appraisal action and escrow a portion of their merger proceeds?

Opinions:

Majority - Jacobs, Justice

No. In a short-form merger where a controlling stockholder fails to provide full disclosure, a remedy requiring minority stockholders to 'opt-in' and escrow merger proceeds is legally erroneous. The proper remedy is a quasi-appraisal class action where all minority shareholders are automatically included unless they opt out, and they are not required to escrow any funds. The court reasoned that under Glassman v. Unocal, a controlling shareholder's right to the exclusive remedy of appraisal is conditioned upon providing full disclosure of all material facts. When that duty is breached, the fiduciary forfeits the benefit of a limited remedy. The court determined that forcing shareholders to 'opt-in' and escrow funds places an unfair burden on the victims of the fiduciary breach. An 'opt-out' class action is superior because it protects shareholders from forfeiting their rights and places the procedural burden on the wrongdoing fiduciary. Fairness dictates that since minority shareholders are held to strict compliance with appraisal statutes, a majority shareholder who fails its disclosure duty should likewise forfeit the statutory protections that would make recovery more difficult for the minority.

Analysis:

This decision clarifies the remedy for disclosure violations in short-form mergers, a question left open by Glassman v. Unocal. By establishing an 'opt-out' quasi-appraisal class action as the default remedy, the court created a more shareholder-protective framework. This holding significantly increases the incentive for controlling shareholders to comply with their disclosure obligations, as a breach now triggers a more administratively burdensome and potentially expensive class action rather than a simple 'do-over' of the appraisal process for a limited number of dissenters. The ruling effectively shifts procedural risks from the wronged minority shareholders to the breaching fiduciary, strengthening protections for minority investors in cash-out transactions.

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