If a company structures a merger to avoid appraisal rights, does a shareholder have no recourse? That question will no doubt be part of the debate as City of North Miami Beach v. Dr. Pepper Snapple Group, Inc. is litigated. In a complaint filed in Delaware Chancery court on March 28, 2018, plaintiffs, a putative class of investors in Dr. Pepper, allege that the Dr. Pepper board has created a merger structure meant to frustrate their appraisal rights and that the merger will ultimately undervalue their shares. Describing the merger structure as one “only a contortionist can appreciate,” the plaintiffs seek to enjoin the merger, announced January 29, 2018, between Dr. Pepper and Keurig, among other remedies [$$].
According to the complaint, the ‘merger’ at issue has been structured as an amendment to Dr. Pepper’s charter, which would multiply the number of Dr. Pepper shares by seven. The shares would be issued to Keurig shareholders, the result being that post-merger/not-merger, Keurig shareholders would own about 87% of Dr. Pepper – a de facto merger, according to the complaint. In economic effect, Keurig will purchase ‘new’ Dr. Pepper shares (as a result of the total share count being multiplied by seven) and thereby receive a supermajority of total company shares, rather than purchasing 87% of Dr. Pepper on the market or via a tender offer.
How are appraisal rights involved? The consideration for the share issuance takes the form of a onetime cash dividend for $103.75 per share to pre-amendment shareholders. Normally, if this were a classic merger, such a deal would be subject to appraisal rights under DGCL §262 – a cash merger has appraisal rights attached. But the unique Dr. Pepper structure would not provide for appraisal rights – because the stockholders are just approving an amendment, so the theory goes, they are not actually engaged in a merger.
The plaintiff in Dr. Pepper pleads that appraisal rights are meaningful and important to investors, writing “The availability of appraisal provides an important protection for all investors, including small investors who could not otherwise bear the expense and burden of pursuing appraisal actions on their own. This is because the assertion of appraisal rights by the investors who can justify the investment provides a deterrent to corporate misconduct and incentivizes fair pricing.”
This is the fourth lawsuit challenging the Dr. Pepper merger, but one of the relatively rare lawsuits that focus on appraisal rights and their availability in a merger (or not-merger, as the case may be). We will follow developments in this action.