In Kahn v. Stern, an opinion issued by the Delaware Court of Chancery mid last year, the Court dismissed a breach of fiduciary duty claim seeking, among other remedies, quasi-appraisal damages.  The case arose out of the sale of Kreisler Manufacturing Corporation (“Kreisler”), a small, thinly-traded (listed only on the pink sheets), public aerospace manufacturing company, to Arlington Capital Partners (“Arlington”).  The merger was approved by written consent of a majority of Kreisler’s outstanding shares, without a stockholder vote, and was announced on May 31, 2016.  That same day, Kreisler distributed an information statement to its shareholders to inform them of the deal and allow them to decide whether to exercise their appraisal rights—the deadline for seeking appraisal was June 20, 2016.  Notably, the merger agreement contained an “appraisal out” provision that permitted Arlington to back out of the merger if more than 10% of Kreisler’s outstanding shares sought appraisal (see our prior posts discussing such provisions here, here, and here).  The plaintiff, however, did not seek to enjoin the merger pre-close or exercise his appraisal rights by the appraisal cutoff.  Instead, the plaintiff filed a complaint for breach of fiduciary duty against the Kreisler board days after the appraisal deadline had passed.

The complaint, among other things, alleged that the Kreisler board breached its fiduciary duties by: (1) approving the transaction in light of certain “side deals” that were negotiated by two inside directors in connection with the merger, and (2) making misstatements and omissions in the information statement provided to Kreisler’s shareholders.  With regard to the disclosure claims, the plaintiff alleged that the defendants knowingly withheld or misrepresented material information in the information statement to reduce the likelihood that Kreisler’s shareholders would prevent the merger by asserting appraisal rights, and in so doing, the defendants deprived Kreisler’s shareholders of their ability to make a fully informed decision regarding their appraisal rights.  In light of the injury caused by these alleged disclosure deficiencies, the plaintiff sought quasi-appraisal damages.

In deciding the disclosure claims, the Court noted that if the plaintiff had sought injunctive relief before the merger closed, such relief may have been warranted.  The Court explained that, in the pre-close, injunctive relief context, the Court would have applied enhanced scrutiny and looked to whether the information statement withheld or misstated information material to the stockholders’ decision to approve the deal or seek appraisal.  In the post-closing, damages context, on the other hand, the Court explained that the plaintiff must have alleged facts making it reasonably conceivable that the director defendants, who were found to be independent and disinterested and were protected by an exculpatory charter provision, acted in bad faith in issuing the disclosures.  The Court found that nothing in the record, even in light of the side deals and appraisal-out provision, created an inference that the alleged disclosure deficiencies were made in bad faith.  Thus, the Court dismissed the disclosure claims, which included the plaintiff’s request for quasi-appraisal damages.

For additional insight on the Court’s views on the quasi-appraisal remedy, see our prior post here.

In last month’s decision in Houseman v. Sagerman, Vice Chancellor Glasscock addressed the common law analogue to Delaware’s appraisal rights statute – the remedy of “quasi-appraisal” for a breach of fiduciary duty.  In the November 19 opinion, the court described a long litigation history stemming from the merger of Universata, Inc., into an LLC purchaser.  The Housemans, shareholders of Universata, did not in the first instance exercise statutory appraisal rights, choosing instead to sue a putative purchaser of their shares under a “put contract” in Minnesota.  The Minnesota state court dismissed that breach of contract action in 2012.  More than two years after the close of the Universata merger, the Housemans filed a complaint in Delaware Chancery alleging breach of fiduciary duty in the sale process.  Of interest to us was the Court’s discussion of the Housemans’ claim for quasi-appraisal.  Vice Chancellor Glasscock observed that quasi-appraisal was not a cause of action at all, but was rather a remedy available to shareholders upon a finding of a breach of fiduciary duty.  The Vice Chancellor acknowledged that there could be confusion as to what, exactly, quasi-appraisal was, but made clear that it is ultimately a remedy whereby the court awards shareholders damages “based on the going-concern value of their previously owned stock” upon an appropriate finding of liability.  For background on the quasi-appraisal remedy in stockholder litigation in general, see this article from the HLS Forum on Corporate Governance and Financial Regulation.

Notwithstanding the ostensive viability of their claim, the Housemans would not receive quasi-appraisal – not because it was not a cause of action, but because of the doctrine of laches, an equitable doctrine similar to a statute of limitations that bars a cause of action when there is prejudicial delay in bringing it.  In the Houseman case, the plaintiffs waited 27 months to bring a breach of fiduciary duty claim (and thus seek quasi-appraisal), choosing to litigate the Minnesota breach of contract issues in the first instance.  The Court thus granted summary judgment to defendants on the breach of fiduciary claim, and in doing so barred the quasi-appraisal remedy, as the claim was simply brought too late.

**Update on January 21, 2016: the Westlaw Journal has now covered the same case discussed in this post:  Houseman et al. v. Sagerman et al., 31 Westlaw Journal Delaware Corporation Law Update 3 (2016).