Non-Appearing Dissenters

In his second appraisal decision in as many months, Chancellor Bouchard faced the novel question of whether the Chancery Court can approve a settlement between the surviving company and certain non-appearing dissenters, who had never themselves filed or joined in an appraisal petition, if the terms of that settlement are unavailable to all of the dissenters who had perfected appraisal rights.  Under the Chancellor’s decision in Mannix v. PlasmaNet, Inc., the answer is yes.

Mannix was not a valuation decision but a procedural ruling.  The issue arose because Delaware’s appraisal statute is in certain ways similar to the class action device, in which one plaintiff serves as a representative in a lawsuit on behalf of all other similarly situated plaintiffs.  Specifically, the appraisal statute provides that one appraisal petition can serve as the “representative” appraisal action for all other dissenting shareholders, and that the fair value determination reached in that proceeding will be available to all dissenters who have perfected their appraisal rights even if they had not filed their own petition.  As the Chancellor is careful to note, however, there is “at least one notable distinction” between the procedures available in an appraisal proceeding and those in a class action: unlike in class actions, in which shareholders elect to “opt out” of the class to pursue individual claims, appraisal petitioners “opt in” to an appraisal proceeding before the litigation even begins by dissenting from the merger and perfecting their rights in the first place.

In Mannix, certain non-appearing dissenters – i.e., stockholders who neither filed their own petitions nor joined in another’s petition – had settled with the surviving Company and were now asking the Court for their appraisal claims to be released.  The settlement was conditioned on the non-appearing dissenters certifying that they were “accredited investors” under the federal securities laws, a necessary condition because the settlement consideration consisted of their receiving the surviving Company’s unregistered stock.  The Company made the same offer to the named appraisal petitioner (Mannix), who rejected it.

Chancellor Bouchard rejected both of the petitioner’s challenges to the settlement.  The petitioner first argued that the Company could not condition a settlement on a dissenter’s status as an accredited investor, since not every non-appearing dissenter may qualify as accredited.  The Chancellor held that this argument was unsupported by any law or precedent and distinguished two earlier appraisal cases that had raised the specter of a “buy off,” whereby the named appraisal petitioner settles the proceedings to the benefit of himself and the Company, but to the detriment of all other non-appearing appraisal petitioners that he was in effect representing.  Chancellor Bouchard found that these concerns were not before him, where any purported “buy off” – if there even was one – was being undertaken by a non-appearing dissenter, and thus would have no effect whatsoever on Mannix’s ability to prosecute his own appraisal action on behalf of himself and any other non-appearing dissenters who remained.

The Chancellor drew another analogy to class action settlements, citing former Chancellor Allen for the proposition that “a defendant in a putative [i.e., pre-certification] class action is readily permitted under the law to settle a class claim with non-representative class members.”  Likewise, the surviving company in an appraisal proceeding is similarly able to settle directly with non-appearing dissenters.

In general, in making these references to the class action vehicle, the Chancellor made a point of showing how appraisal rights are also representative actions, albeit in different form, and that the statute in fact encouraged the notion of representation by requiring that only one appraisal petition be filed – whether by the surviving corporation itself or by a former stockholder – thereby entitling all former stockholders who perfected their appraisal rights to receive “fair value” even if they did not file a petition themselves.  Indeed, the court noted that the right to appraisal ceases if all interested persons failed to file a petition for appraisal within the statutory 120-day period following consummation of the transaction.

The Chancellor was also unmoved by the petitioner’s second argument, that settling non-appearing dissenters out of an appraisal case would “undercut the economics of the appraisal proceeding” by reducing the total shares at issue and, accordingly, the aggregate recovery available in the proceeding.  The court found that the petitioner happened to be the first shareholder to file an appraisal demand, and thus had already accepted the risk from day one that he might end up being the only one to so file, even though that risk never came to pass.  The Chancellor also observed that if he were to hold otherwise, it would give named appraisal petitioners a “hold-up right” to block any settlement, which was not envisioned by the appraisal statute.

The transaction is also notable for its incredibly small size: the total merger consideration for this deal after adjustments was just $114,000, or six-tenths of a penny for each of the 19,307,715 shares of outstanding PlasmaNet stock, and the named petitioner brought this action seeking appraisal of his 1,700 shares.