In re Sears Hometown and Outlet Stores, Inc. Stockholder Litigation
N/A (2025)
Rule of Law:
When a stockholder who sought appraisal later joins a plenary action for breach of fiduciary duty after a merger, they are entitled to the full judicially determined fair price for their shares without offset, unlike class members who already received the merger consideration, to ensure equal recourse and prevent unjust enrichment for the fiduciary.
Facts:
- In 2005, Edward S. Lampert orchestrated a merger consolidating Sears, Roebuck and Co. and Kmart Corporation under Sears Holdings Corporation ('Holdings'), where he controlled a majority of Holdings' common stock.
- In 2012, Holdings spun off Sears Hometown and Outlet Stores, Inc. (the 'Company') as a separate public entity, with Lampert receiving a majority of its common stock and controlling the Company.
- In 2019, the Company and Holdings entered a merger agreement, converting each Company share into the right to receive $3.21 ('Merger Consideration') from Transform Holdco LLC ('Parent'), making the Company a wholly owned subsidiary of Parent.
- The Merger Agreement stipulated that dissenting shares seeking appraisal would not receive the Merger Consideration, but if appraisal rights were lost or withdrawn, those shares would automatically convert to the right to receive the Merger Consideration.
- Cannon Square, LLC (the 'Fund') acquired Company shares, demanded appraisal, and initiated an appraisal proceeding, thus not receiving the Merger Consideration at the time of the merger.
- In 2022, the Company and Parent filed voluntary petitions for bankruptcy, rendering the Fund's potential contractual entitlement to the Merger Consideration valueless due to insolvency.
Procedural Posture:
- After the 2019 merger announcement, stockholder plaintiffs filed putative class actions challenging the merger terms.
- Once the merger closed, these claims were consolidated into a single putative class action (the 'Plenary Action').
- Cannon Square, LLC (the 'Fund') demanded appraisal and initiated an appraisal proceeding (the 'Appraisal Proceeding').
- In 2020, the Court of Chancery entered an order coordinating the Plenary Action and Appraisal Proceeding for purposes of discovery and trial.
- In 2021, the Court of Chancery entered an order certifying a class in the Plenary Action.
- In 2022, the Company and Parent filed voluntary petitions for bankruptcy, impacting the viability of the Appraisal Proceeding.
- In 2023, the Court of Chancery approved a stipulated modification to the class certification order that explicitly included stockholders who had exercised their appraisal rights within the Plenary Action class.
- In 2024, the Court of Chancery issued a post-trial decision finding the merger was not entirely fair and held that the Company’s stockholders were entitled to $4.99 per share, awarding compensatory damages of $1.78 per share to class members who had received the merger consideration.
- Defendant Lampert moved for reargument, and the Court of Chancery agreed in part, reducing the fair price determination to $4.06 per share, and consequently reducing the compensatory damages award to $0.85 per share for class members who had received the merger consideration.
- The Fund, having not received the merger consideration, moved to intervene in the Plenary Action to establish its entitlement to the full fair price damages award, and the court granted intervention.
- The plaintiffs in the Plenary Action subsequently settled with Lampert for total proceeds of $10 million, with the Fund being part of the class.
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Issue:
Does a stockholder who exercised appraisal rights and subsequently joins a class-action lawsuit for breach of fiduciary duty in connection with the same merger, but who has not received the merger consideration, have a right to recover the full judicially determined fair price of their shares, or are they limited to only the incremental damages awarded to other class members who already received the merger consideration?
Opinions:
Majority - Laster, V.C.
Yes, a stockholder who sought appraisal and subsequently joins a class-action lawsuit for breach of fiduciary duty in connection with the same merger, but who has not received the merger consideration, has a right to recover the full judicially determined fair price of their shares, as they are not subject to the offset for merger consideration applied to other class members who already received it. The court relied on Cede & Co. v. Technicolor, Inc., which established that stockholders can simultaneously pursue appraisal rights and plenary claims for breach of fiduciary duty, with the only limitation being the avoidance of double recovery. Technicolor also contemplated that a plenary remedy could render an appraisal proceeding moot, a scenario only possible if the plenary award included the full fair value, not just incremental damages, for appraisal claimants. Subsequent Delaware decisions, such as In re Mindbody, Inc., S’holder Litig. and In re Emerging Commc’ns, Inc. S’holders Litig., have consistently affirmed that appraisal claimants who opt into a plenary recovery are entitled to the full fair price without offset if they did not receive the merger consideration. The court clarified that the 'out-of-pocket' damages measure in fiduciary duty cases is a fair price for the shares, from which the merger consideration is merely deducted for those who received it to avoid double recovery, rather than altering the underlying damages entitlement. This approach aligns with the broad remedial powers of the Court of Chancery in loyalty breach cases, aiming to eliminate profit for fiduciaries and ensure the beneficiary is not harmed. The court rejected Lampert's arguments that the Fund was seeking 'something extra,' that the appraisal statute prohibited this, that a fraud requirement was unmet, that only rescission could moot an appraisal, or that the claim was waived, deeming these misinterpretations or issues previously decided by Technicolor or its progeny. Additionally, a pending class action tolls the statute of limitations for all putative class members.
Analysis:
This decision significantly clarifies the intersection of appraisal rights and fiduciary duty claims in Delaware, particularly regarding damages calculations for stockholders who initially pursue appraisal but then join a plenary action. It reinforces the broad remedial powers of the Court of Chancery in breach of loyalty cases and ensures that fiduciaries cannot unjustly benefit from their misconduct, even amidst complex procedural scenarios or corporate insolvencies. The ruling emphasizes that the purpose of a plenary action is to make harmed stockholders whole by awarding the fair price of their shares, with any offsets only applying where a prior payment, such as merger consideration, has actually been received. This interpretation prevents fiduciaries from retaining illicit gains due to procedural distinctions between different classes of harmed shareholders and promotes consistency in remedies.
