Lynch v. Vickers Energy Corp.
429 A.2d 497, 1981 Del. LEXIS 300 (1981)
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Rule of Law:
When a majority shareholder breaches its fiduciary duty of complete candor in a transaction with minority shareholders, the appropriate remedy is rescission or, if rescission is not feasible, rescissory damages designed to disgorge the fiduciary's profits, rather than an out-of-pocket damage calculation based on the stock's value at the time of the transaction.
Facts:
- Vickers Energy Corporation (Vickers) was the majority stockholder of TransOcean Oil, Inc. (TransOcean).
- Vickers' management authorized open-market purchases of TransOcean stock for prices up to $15 per share.
- A highly qualified petroleum engineer within TransOcean's management internally calculated the company's net asset value to be worth significantly more than the value later disclosed in Vickers' tender offer.
- Vickers initiated a tender offer to acquire the remaining publicly held shares of TransOcean from minority stockholders for $12 per share.
- In its tender offer materials, Vickers failed to disclose that it had authorized purchases up to $15 per share and also failed to disclose the higher internal net asset value calculation.
- Relying on the incomplete information in the tender offer, a class of minority shareholders sold their shares to Vickers for the $12 per share price.
- Subsequently, TransOcean was merged into Esmark, Inc., Vickers' parent company.
Procedural Posture:
- Plaintiff stockholders filed a class action suit against Vickers Energy Corporation in the Delaware Court of Chancery (trial court).
- The Court of Chancery entered judgment for the defendants.
- Plaintiffs (appellants) appealed to the Delaware Supreme Court, which reversed and found that Vickers (appellee) had breached its fiduciary duty of complete candor.
- The case was remanded to the Court of Chancery for further proceedings on the issue of relief.
- On remand, the Court of Chancery held a trial on damages and again entered judgment for the defendants, ruling that plaintiffs had suffered no financial damage because the price they received was higher than the court's calculated 'fair value' of the stock.
- Plaintiffs (appellants) filed a second appeal to the Delaware Supreme Court concerning the trial court's ruling on the proper measure of damages.
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Issue:
Does a breach of a majority shareholder's fiduciary duty of complete candor in a tender offer limit the minority shareholders' remedy to an out-of-pocket damage calculation, or does it entitle them to rescissory damages?
Opinions:
Majority - Justice Duffy
No. The remedy for a breach of a majority shareholder's fiduciary duty of complete candor is not limited to an out-of-pocket damage calculation; rather, the shareholders are entitled to rescission or, if rescission is infeasible, rescissory damages. The trial court erred by applying the damage rule from a common law fraud case, which focuses on out-of-pocket loss. A claim based on a breach of fiduciary duty permits a different, more expansive form of relief designed to prevent the fiduciary from being unjustly enriched by its wrongdoing. Since rescission is impractical due to the subsequent merger of TransOcean, the proper remedy is rescissory damages, which are the monetary equivalent of rescission. This is calculated to equal the increment in value that the fiduciary, Vickers, enjoyed as a result of acquiring and holding the stock, measured at the time of judgment. This approach does not require the plaintiffs to prove economic loss, as the primary goal is to strip the fiduciary of its ill-gotten gains.
Dissenting - Justice Quillen
Yes. The remedy could be limited to an out-of-pocket calculation because the choice of an equitable remedy is within the sound discretion of the Chancellor, and there was no abuse of discretion in this case. The Chancellor properly evaluated the evidence and the nature of the specific fiduciary breach and determined that an appraisal-style, out-of-pocket remedy was appropriate. The majority's holding imposes a rigid, mandatory damage rule that strips the Court of Chancery of its flexibility to tailor remedies to the specific facts of a case. To be absolutely bound by the analogy to a disloyal trustee to the exclusion of all other remedies is an error that improperly constrains the discretionary power of equity courts.
Analysis:
This decision significantly strengthens protections for minority shareholders in Delaware by establishing a powerful remedy for breaches of the fiduciary duty of candor. By rejecting the out-of-pocket measure of damages in favor of rescissory damages, the court ensures that a fiduciary cannot profit from its disclosure violations, even if the price offered was arguably 'fair' at the time. This shifts the focus of the remedy from compensating the plaintiff's loss to disgorging the defendant's gain. The ruling creates a strong deterrent for majority shareholders and corporate insiders, compelling them to adhere to a high standard of 'complete candor' in transactions with minority owners.
