Informed Consent to Merger Price

The Review of Securities & Commodities Regulation recently published “The Shift in Delaware Appraisal Litigation” (full article $$$), suggesting, as have other authors, that Delaware appraisal has moved to a realm where process questions are central to the appraisal analysis. This will be little surprise to readers of this blog; while appraisal is distinct from fiduciary claims, recent cases have focused increasingly on a search for process issues, and the absence of issues with the sales process has led some Delaware Chancellors to conclude that merger price (or other price) is the proper measure barring such process issues. Whether that will continue as the caselaw develops in 2018 is yet to be seen; and as Court’s clarify what can be problematic about a process we may well see decisions giving greater clarity to where one can expect the “shift” to take us.

Probably – at least according to this analysis posted on the Harvard Corporate Governance Forum.  The analysis provides extensive discussion of Norcraft and Solera**, two recent decisions we’ve also noted.

The authors conclusion will be familiar to regular readers of this blog: “appraisal decisions likely will continue to focus on many of the same issues that courts examine when considering breach of fiduciary duty claims in the merger context as well as assessing whether the seller’s stock trades in an efficient market.”  As other authors have suggested, sales process and market efficiency may be the new focus of appraisal proceedings – seemingly a litigation crossover from fiduciary duty litigation (as to process) and fraud litigation (market efficiency).

** This firm is counsel of record to petitioners in the Solera matter.

Last month the Delaware governor appointed attorney Andre Bouchard to take the helm of Delaware’s Chancery Court, where he will assume the Chancellor’s position vacated by Chancellor Strine’s elevation to the Delaware Supreme Court. The seventy-eight reported decisions that bear Mr. Bouchard’s name don’t tell the full story of the cases he has handled during his career in private practice, but we do know this much: he has brought at least one appraisal rights petition, in the case of Nagy v. Bistricer, 770 A.2d 43 (Del. Ch. 2000), and his law firm handled several other appraisal rights cases as well, typically as respondents, including as counsel for the respondent company in the well-known line of cases involving Cede & Co. v. Technicolor, Inc.

In Nagy, Mr. Bouchard represented Ernest Nagy, the sole minority stockholder of Riblet Products Corp., a closely held manufacturer of power cords and wires. Riblet was acquired by Coleman Cable Acquisition, Inc. in what then-Vice Chancellor Strine described as “an extremely unusual merger agreement”; the two individuals who were the controlling stockholders and directors of Riblet were also the controlling stockholders and directors of Coleman. Nagy, 770 A.2d at 46. In addition, the disclosures provided to Nagy in connection with his decision whether to seek appraisal or accept the merger consideration contained no information about why or how the two controlling stockholders and directors of the target had approved the merger agreement; no information regarding their interest in the acquirer; and no financial information about the target or the acquirer. Id. Moreover, Nagy was forced to decide whether to exercise appraisal rights even before he knew for certain what the final merger consideration would be.

Based on these unusual facts, the court rejected the company’s argument that appraisal was Nagy’s exclusive remedy, and found, among other things, that Nagy was permitted to pursue his unfair dealing and appraisal claims in a combined civil action; that the controlling shareholders of Riblet breached their fiduciary duties by failing even to attempt to provide Nagy with adequate disclosures that would allow him to make an informed decision as to whether to elect appraisal or accept the merger consideration; and that they breached their fiduciary duties by inequitably coercing Nagy into a forced appraisal.

Of course, the cases Mr. Bouchard handled as an advocate say nothing about how he will view appraisal rights cases once he becomes Chancellor. Indeed, the underlying conduct in Nagy was found to be so egregious that the court actually awarded Nagy attorneys’ fees under the “bad faith” exception to the American rule — by which both parties usually pay their own fees in a lawsuit, win or lose, as opposed to the English rule requiring the loser to pay — for being forced to respond to the defendants’ frivolous arguments made in support of their motion to dismiss and in opposition to Nagy’s motion for summary judgment.

Bouchard’s appointment has been well received among the bar. As reported in Law360 at the time of his initial appointment, Bouchard is expected to be a “more even-keeled judge” than former Chancellor Strine, who was one of the most outspoken Chancellors ever to serve in the Chancery Court. Bouchard has been described by other lawyers as an “outstanding individual” who is not a “flamethrower,” and who was favorably characterized as not necessarily becoming another Chancellor Chandler or a Chancellor Strine, but who will simply be himself, providing a “huge benefit” to the Chancery Court.