Lynch v. Vickers Energy Corp.
1981 Del. LEXIS 300, 429 A.2d 497 (1981)
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Rule of Law:
Where a majority shareholder breaches their fiduciary duty of complete candor by failing to disclose material information in a tender offer, the proper remedy for minority shareholders is not an out-of-pocket measure of damages, but rescissory damages designed to disgorge the fiduciary's resulting profits.
Facts:
- Vickers Energy Corporation (Vickers) was the majority shareholder of TransOcean Oil, Inc. (TransOcean).
- Vickers initiated a tender offer to acquire the remaining publicly held shares of TransOcean for $12 per share.
- In its tender offer, Vickers failed to disclose that a highly qualified petroleum engineer within TransOcean had calculated the company's net asset value to be worth significantly more than the minimum value disclosed.
- Vickers also failed to disclose that its own management had authorized open-market purchases of TransOcean stock for prices up to $15 per share immediately preceding the tender offer.
- A class of minority shareholders, represented by the plaintiff, tendered their shares to Vickers for $12 per share in reliance on the offering documents.
- Subsequent to the tender offer, TransOcean was merged into Vickers' parent company, Esmark, Inc.
Procedural Posture:
- A class of TransOcean stockholders sued Vickers Energy Corp. in the Delaware Court of Chancery (trial court) for breach of fiduciary duty.
- The Court of Chancery entered judgment in favor of the defendants, Vickers.
- The plaintiff class (as appellant) appealed to the Delaware Supreme Court (highest court).
- In the first appeal, the Supreme Court found Vickers breached its fiduciary duty of complete candor and remanded the case to the Court of Chancery for further proceedings.
- On remand, after a trial on damages, the Court of Chancery again entered judgment for Vickers, concluding the plaintiffs suffered no damages as the tender price of $12 exceeded the stock's calculated fair value of $11.85.
- The plaintiff class (as appellant) appealed the Court of Chancery's second judgment to the Delaware Supreme Court.
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Issue:
In an action for breach of fiduciary duty by a majority shareholder who failed to disclose material facts in a tender offer, is the minority shareholders' remedy limited to an out-of-pocket, appraisal-style measure of damages?
Opinions:
Majority - Duffy, Justice
No. In an action for breach of fiduciary duty by a majority shareholder, the remedy is not limited to an out-of-pocket, appraisal-style measure of damages. A claim founded on a breach of fiduciary duty permits broader equitable relief, including rescission or its monetary equivalent. The trial court erred by applying the damage formula from Poole, a fraud case, which is inappropriate for a breach of fiduciary duty claim. Because actual rescission is now impractical due to the merger of TransOcean, the correct remedy is rescissory damages. This measure is calculated to be the monetary equivalent of rescission, which equals the increment in value that Vickers, the fiduciary, enjoyed by acquiring and holding the stock. This approach prevents the breaching fiduciary from retaining the profits of its wrongdoing and does not require the plaintiffs to prove out-of-pocket economic loss as a precondition to recovery.
Dissenting - Quillen, Justice
Yes. The minority shareholders' remedy could be limited to an out-of-pocket, appraisal-style measure of damages because the choice of an equitable remedy is within the sound discretion of the Chancellor. The Chancellor did not abuse his discretion by analogizing to the damages methodology used in Poole. A fiduciary duty analysis 'only begins analysis,' and the Chancellor properly assessed the nature of the breach as being non-fraudulent omissions and concluded the appraisal approach was appropriate. The majority's decision improperly infringes on the trial court's discretionary power to fashion a remedy based on the specific facts and evidence of the case.
Analysis:
This decision significantly strengthens protections for minority shareholders in Delaware by establishing a clear distinction between remedies for common law fraud and remedies for a breach of the fiduciary duty of candor. By rejecting a simple out-of-pocket measure and mandating rescissory damages, the court ensures that a breaching fiduciary cannot profit from its wrongdoing. This precedent created a powerful deterrent against non-disclosure by majority shareholders in transactions with the minority, shifting the financial risk of subsequent appreciation in value onto the breaching party. It solidifies the principle that fiduciaries must disgorge all gains obtained through a breach of trust, regardless of whether the beneficiary can prove an immediate financial loss at the time of the transaction.
