Rosenblatt v. Getty Oil Co.
1985 Del. LEXIS 581, 493 A.2d 929 (1985)
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Rule of Law:
In a merger between a parent and its subsidiary, the parent company bears the burden of proving the transaction's entire fairness. However, if the merger is approved by an informed vote of a majority of the minority shareholders, the burden shifts to the plaintiffs to prove that the transaction was unfair.
Facts:
- Getty Oil Company (Getty) was a large petroleum company that held a controlling majority of the stock of Skelly Oil Company (Skelly), another integrated oil company.
- Following the death of J. Paul Getty in June 1976, and under threat of a lawsuit from a Skelly minority shareholder, Getty's management initiated discussions to merge Getty, Skelly, and Mission Corporation (a holding company) into a single entity.
- On July 15, 1976, representatives from Getty and Skelly met, agreed a merger was desirable, and decided to pursue a stock-for-stock exchange.
- Both companies retained independent investment banking firms (Getty hired Blyth Eastman; Skelly hired Smith Barney) and jointly retained a neutral petroleum engineering firm, DeGolyer and MacNaughton (D&M), to assist in valuation.
- The parties engaged in adversarial, arm's-length negotiations; Getty sought to create a legally defensible transaction, while Skelly's negotiators sought the highest possible price for its minority shareholders.
- When negotiations over the value of their respective subsurface oil and gas reserves reached an impasse, the parties agreed to delegate the final valuation of these assets to D&M, making its determination binding.
- After further intense negotiations over the weighting of assets, earnings, and market price, the parties agreed on November 7, 1976, to an exchange ratio of 0.5875 Getty shares for each Skelly share.
- The merger was subsequently approved by the boards of both companies and by an 89.4% vote of the Skelly minority shares that were voted at the shareholder meeting.
Procedural Posture:
- Minority stockholders of Skelly Oil Company initiated a class action lawsuit against Getty Oil Company in the Delaware Court of Chancery.
- The plaintiffs challenged the fairness of the exchange ratio in the 1977 merger of Skelly into Getty.
- Following a trial, the Chancellor (trial court) entered a judgment holding that the merger was entirely fair to the Skelly minority shareholders.
- The plaintiffs (appellants) appealed the Court of Chancery's decision to the Delaware Supreme Court.
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Issue:
Does a stock-for-stock merger between a parent corporation and its subsidiary satisfy the entire fairness standard when the transaction was structured to simulate arm's-length bargaining and the resulting price was based on then-accepted valuation methods?
Opinions:
Majority - Moore, Justice
Yes, the stock-for-stock merger satisfies the entire fairness standard. A transaction involving a controlling shareholder must be evaluated for entire fairness, which comprises two aspects: fair dealing and fair price. The burden of proof initially rests on the controlling shareholder, but shifts to the challenging plaintiffs if the transaction is approved by an informed majority of the minority stockholders. Here, the burden shifted to the plaintiffs, and they failed to prove unfairness. The record demonstrates fair dealing through an adversarial, arm's-length negotiation process where Skelly's representatives bargained forcefully for the minority's interests, nearly causing negotiations to collapse on multiple occasions. The delegation of the subsurface asset valuation to an independent expert, D&M, was a proper exercise of business judgment made necessary by the impasse. The price was fair because it was the product of this hard bargaining and was calculated using the Delaware Block method, the exclusive valuation technique approved by Delaware courts at the time. The final exchange ratio represented the substantial equivalent in value of what the Skelly minority shareholders held before the merger.
Analysis:
This decision provides a crucial application of the entire fairness standard articulated in Weinberger v. UOP, Inc., demonstrating how a controlling shareholder can satisfy this stringent test. It establishes that simulating a true, arm's-length bargaining process, even within a controlled transaction, is powerful evidence of fair dealing. The case also solidifies the procedural importance of obtaining an informed vote from the majority of the minority shareholders, which shifts the formidable burden of proving unfairness onto the plaintiffs. Finally, it clarifies that the disclosure duties outlined in Weinberger are not a blanket requirement for a parent to reveal its top price, but are instead tied to specific fiduciary breaches by directors who serve on both company boards.
