Glassman v. Unocal Exploration Corporation

Supreme Court of Delaware
777 A.2d 242 (2001)

ELI5:

Rule of Law:

In a short-form merger executed pursuant to 8 Del. C. § 253, a parent corporation is not required to establish the entire fairness of the transaction. Absent fraud or illegality, the exclusive remedy for minority stockholders dissatisfied with the merger consideration is a judicial appraisal of their shares.

Facts:

Unocal Corporation, an earth resources company, owned approximately 96% of the stock of Unocal Exploration Corporation ('UXC').
In 1991, facing declining revenues from low natural gas prices, Unocal decided to eliminate UXC's minority shareholders to reduce taxes and overhead expenses.
In December 1991, both Unocal and UXC appointed special committees to consider a potential merger.
The UXC committee, after retaining financial and legal advisors, agreed to a merger exchange ratio of .54 shares of Unocal stock for each share of UXC.
Unocal announced the merger on February 24, 1992, and effected it on May 2, 1992, pursuant to the short-form merger statute, 8 Del. C. § 253.

Procedural Posture:

Plaintiffs, on behalf of UXC's minority stockholders, filed a class action lawsuit against Unocal in the Delaware Court of Chancery.
The complaint alleged that Unocal and its directors breached their fiduciary duties of entire fairness and full disclosure.
After a two-day trial, the Court of Chancery held that the entire fairness standard does not control in a short-form merger and that the plaintiffs' exclusive remedy was appraisal.
The Court of Chancery also found that the merger prospectus contained no material misstatements or omissions.
Plaintiffs (appellants) appealed the decision of the Court of Chancery to the Delaware Supreme Court.

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Issue:

Does the fiduciary duty of entire fairness, which includes both fair dealing and fair price, apply to a short-form merger conducted under 8 Del. C. § 253, or is appraisal the exclusive remedy for minority stockholders absent fraud or illegality?

Opinions:

Majority - Berger, J.

No. The fiduciary duty of entire fairness does not apply to a short-form merger under § 253, and absent fraud or illegality, appraisal is the stockholders' exclusive remedy. The court reasoned that the short-form merger statute authorizes a summary, unilateral procedure that is fundamentally inconsistent with the 'fair dealing' prong of the entire fairness standard, which contemplates negotiation, director approval, and stockholder votes. Forcing a parent corporation to engage in these 'fair dealing' steps would negate the statute's purpose of providing a simple, fast, and inexpensive process. Therefore, the court held that the General Assembly circumscribed the parent's fiduciary duties in this context, obviating the need to establish entire fairness. The duty of full disclosure remains, however, to ensure stockholders have the material information needed to decide whether to accept the merger consideration or seek appraisal. The modern appraisal proceeding is the appropriate and exclusive forum to resolve valuation disputes, and it is broad enough to consider factors such as merger timing that might otherwise be part of an unfair dealing claim.

Analysis:

This decision provides a clear and definitive rule for short-form mergers in Delaware, resolving the long-standing tension between the entire fairness doctrine and the § 253 statute. It establishes that a parent corporation can rely on the statutory process without needing to create a transactional record of 'fair dealing,' such as using special committees, to defend against fiduciary duty claims. This significantly reduces litigation risk for parent companies effecting short-form mergers, limiting minority stockholder recourse to valuation disputes through appraisal, except in rare cases of fraud or illegality. The ruling distinguishes short-form mergers from long-form mergers, where the full entire fairness standard articulated in cases like Weinberger continues to apply.

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