Cede & Co. v. Technicolor, Inc.
684 A.2d 289, 1996 WL 613201 (1996)
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Rule of Law:
In a statutory appraisal proceeding, the fair value of a company must be determined by considering all relevant factors of the company as a going concern on the merger date, including non-speculative business plans implemented by a new majority shareholder after gaining control but prior to the final cash-out merger.
Facts:
- Technicolor, a company in the film industry, was experiencing declining profits and a low stock price, partly due to a failing new venture called One Hour Photo (OHP) championed by its CEO, Morton Kamerman.
- In the late summer of 1982, Ronald O. Perelman, controlling MacAndrews & Forbes Group (MAF), identified Technicolor as an attractive takeover candidate.
- On October 29, 1982, Technicolor's board accepted MAF's offer to acquire the company for $23 per share.
- By November 30, 1982, MAF completed a tender offer, acquiring 82.19% of Technicolor's shares and gaining majority control.
- Between gaining control in November 1982 and the final merger in January 1983, Perelman began implementing a new business plan for Technicolor, which involved divesting unprofitable divisions like OHP to focus on core businesses.
- On January 24, 1983, the merger was completed, and the remaining minority shareholders, including Cinerama, were cashed out at $23 per share.
Procedural Posture:
- Cinerama filed a statutory appraisal action against Technicolor in the Delaware Court of Chancery to determine the fair value of its shares following a cash-out merger.
- Cinerama also filed a separate personal liability action against Technicolor's directors for fraud and unfair dealing.
- In the appraisal action, the Court of Chancery determined the fair value of Technicolor stock was $21.60 per share.
- Based on that appraisal value being lower than the merger price of $23, the Court of Chancery entered judgment for the defendants in the personal liability action, finding no damages.
- After a series of appeals and remands related to both cases, the personal liability action was ultimately concluded in favor of the defendants.
- The Court of Chancery then re-entered a final judgment in the appraisal action, reaffirming the $21.60 per share fair value.
- Cinerama, the plaintiff, appealed the final judgment in the appraisal action to the Delaware Supreme Court.
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Issue:
In a statutory appraisal proceeding, does Delaware law require a court to value a company based on the operative business plans and realities in effect on the date of the merger, even if those plans were implemented by a new controlling shareholder after it gained majority control but before the second-step merger was completed?
Opinions:
Majority - Holland, Justice
Yes. In a statutory appraisal proceeding, fair value must be determined based on the company's nature and operational realities as a going concern on the date of the merger. The statutory exclusion of 'any element of value arising from the accomplishment or expectation of the merger' is a very narrow exception that applies only to speculative elements, not to non-speculative, implemented business plans. The Court of Chancery erred by applying a 'but for' test that valued Technicolor based on its pre-acquisition business plan (the 'Kamerman Plan') instead of the new, operative plan implemented by Perelman (the 'Perelman Plan') that was in place on the merger date. Value added to the going concern by a majority acquirer during the period between a tender offer and a second-step merger accrues to the benefit of all shareholders and must be included in the appraisal calculation. To exclude this value would improperly impose a penalty on minority shareholders for their lack of control.
Analysis:
This decision significantly clarifies the scope of the appraisal remedy in Delaware, particularly in the context of two-step mergers. It establishes that the valuation must reflect the company's objective reality on the merger date, including any non-speculative improvements made by the acquirer post-control but pre-merger. This prevents acquirers from capturing a windfall by implementing value-enhancing strategies and then cashing out minority shareholders based on an outdated, lower valuation. The case reinforces that the statutory exclusion for merger-related value is narrowly construed to apply only to speculative projections, not to concrete, implemented changes that are part of the 'going concern' being appraised.
