Title: Applebaum v. Avaya, Inc. et al.
Citation: N/A
Docket Number: 375, 2002
State: Delaware
Issuer: Delaware Supreme Court
Date: November 20, 2002

IN THE SUPREME COURT OF THE STATE OF DELAWARE
MILTON APPLEBAUM,
§ No. 375, 2002
 
§     
Plaintiff Below,
§
Appellant,
§ Court Below:  Court of Chancery 
§ of the State of Delaware in and for
              v.
§ New Castle County
§
AVAYA, INC., JEFFREY A.      
§ C.A. No. 19342
HARRIS, FRANKLIN A.  THOMAS
§
HENRY B. SCHACHT, DANIEL C.
§
STANZIONE, MARK LESLIE,
§
DONALD K.  PETERSON, and
§
PATRICIA F.  RUSSO,
§
§
Defendants Below,
§
Appellees.
§
Submitted: September 25, 2002
Decided:
November 20, 2002
Before VEASEY, Chief Justice, HOLLAND and STEELE, Justices.
Upon appeal from the Court of Chancery.  AFFIRMED.
Ronald A. Brown, Jr., Esquire, and Paul A. Fioravanti, Jr. Esquire (argued), of
Prickett Jones & Elliott, P.A., Wilmington, Delaware; Of Counsel: Arthur T. Susman,
Esquire, of Susman & Watkins, Chicago, Illinois, for Appellants.
Jesse A. Finkelstein, Esquire (argued), Daniel A. Dreisbach, Esquire, Richard
P. Rollo, Esquire, Paul D. Brown, Esquire, and Zoe A. Forrester, Esquire, of Richards,
Layton, & Finger, Wilmington, Delaware; Of Counsel:  Paul J. DiMaio, Esquire, of
Avaya, Inc., Basking Ridge, New Jersey, for Appellees.  
VEASEY, Chief Justice:
In this appeal, we affirm the judgment of the Court of Chancery holding that a
corporation could validly initiate a reverse stock split and selectively dispose of the
fractional interests held by stockholders who no longer hold whole shares.  The Vice
Chancellor interpreted Section 155 of the Delaware General Corporation Law to
permit the corporation, as part of a reverse/forward stock split, to treat its stockholders
unequally by cashing out the stockholders who own only fractional interests while
opting not to dispose of fractional interests of stockholders who will end up holding
whole shares of stock as well as fractional interests.  In the latter instance the
fractional shares would be reconverted to whole shares in an accompanying forward
stock split.  
We hold that neither the language of Section 155 nor the principles guiding our
interpretation of statutes dictate a prohibition against the disparate treatment of
stockholders, for this purpose.  We also hold that the corporation may dispose of those
fractional interests pursuant to Section 155(1) by aggregating the fractional interests
and selling them on behalf of the cashed-out stockholders where this method of
disposition has a rational business purpose of saving needless transaction costs.
A further issue we address is whether, as an alternative method of
compensation, the corporation may satisfy the "fair price" requirement of Section
155(2) by paying the stockholders an amount based on the average trading price of the
corporation’s stock.  Here, the Vice Chancellor properly held that the trading price of
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actively-traded stock of a corporation, the stock of which is widely-held,  will provide
an adequate measure of fair value for the stockholders’ fractional interests for
purposes of a reverse stock split under Section 155.  
Facts
Avaya, Inc. is a Delaware corporation that designs and manages
communications networks for business organizations and large non-profit agencies.
The enterprise is a descendant of the industry standard-bearer, AT&T.  Avaya was
established as an independent company in October of 2000 when it was spun off from
Lucent Technologies.  Lucent itself is a spin-off of AT&T.  Because its capital
structure is the product of two spin-off transactions, the outstanding stock of Avaya
is one of the most widely-held  on the New York Stock Exchange.  Over 3.3 million
common stockholders own fewer than 90 shares of Avaya stock each.
Although a large number of stockholders hold a small stake in the corporation,
Avaya incurs heavy expenses to maintain their accounts.  Avaya spends almost $4
million per year to print and mail proxy statements and annual reports to each
stockholder as well as to pay transfer agents and other miscellaneous fees.
Stockholders who own their stock in street names cost Avaya an additional $3.4
million in similar administrative fees.  
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Since the cost of maintaining a stockholder’s account is the same regardless of
the number of shares held, Avaya could reduce its administrative burden, and thereby
save money for its stockholders, by decreasing its stockholder base.  In February of
2002, at the corporation’s annual meeting, the Avaya board of directors presented the
stockholders with a transaction designed to accomplish this result.  The Avaya board
asked the stockholders to grant the directors authorization to engage in one of three
alternative transactions:
(1)
a reverse 1-for-30 stock split followed immediately by a forward 30-for-
1 stock split of the Common stock
(2)
a reverse 1-for-40 stock split followed immediately by a forward 40-for-
1 stock split of the Common stock
(3)
a reverse 1-for-50 stock split followed immediately by a forward 50-for-
1 stock split of the Common stock.
We refer in this opinion to all three of these alternative transactions as the “Proposed
Transaction” or the “Reverse/Forward Split.”  Regardless of the particular ratio the
board chooses, at some future date the Reverse Split will occur at 6:00 p.m., followed
by a Forward Split one minute later.  Once selected, the effective date of the Split will
be posted on Avaya’s website. 
The transaction will cash out stockholders who own stock below the minimum
number ultimately selected by the directors for the Reverse/Forward Split pursuant to
those three alternative options.  Stockholders who do not hold  the minimum number
of shares necessary to survive the initial Reverse Split will be cashed out and receive
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payment for their resulting fractional interests (the “cashed-out stockholders” or
“targeted stockholders”).  Stockholders who own a sufficient amount of stock to
survive the Reverse Split will not have their fractional interests cashed out.  Once the
Forward Split occurs, their fractional holdings will be converted back into whole
shares of stock. 
Avaya will compensate the cashed-out stockholders through one of two possible
methods.  Avaya may combine the fractional interests and sell them as whole shares
on the open market.  In the alternative, the corporation will pay the stockholders the
value of their fractional interests based on the trading price of the stock averaged over
a ten-day period preceding the Reverse Split.  Stockholders who  hold   their   Avaya
 stock  in  street  names  have  been  advised to contact their 
1  In the Proxy Statement the Board explains that “Avaya intends for the Reverse/Forward Split to treat
shareholders holding Common Stock in street name through a nominee . . . in the same manner as shareholders whose
shares are registered in their names.  Nominees will be instructed to effect the Reverse/Forward Split for their beneficial
holders.  However, nominees may have different procedures and shareholders holding shares in street name should
contact their nominees.” 
2  8 Del.  C. § 155 provides:
Fractions of shares.  A corporation may, but shall not be required to, issue fractions of a share.  If it
does not issue fractions of a share, it shall (1) arrange for the disposition of fractional interests by
those entitled thereto, (2) pay in cash the fair value of fractions of a share as of the time when those
entitled to receive such fractions are determined or (3) issue scrip or warrants in registered form
(either represented by a certificate or uncertificated) or in bearer form (represented by a certificate)
which shall entitle the holder to receive a full share upon the surrender of such scrip or warrants
aggregating a full share.  A certificate for a fractional share or an uncertificated fractional share shall,
but scrip or warrants shall not unless otherwise provided therein, entitle the holder to exercise voting
rights, to receive dividends thereon and to participate in any of the assets of the corporation in the
event of liquidation.  The board of directors may cause scrip or warrants to be issued subject to the
conditions that they shall become void if not exchanged for certificates representing the full shares
or uncertificated full shares before a specified date, or subject to the conditions that the shares for
which scrip or warrants are exchangeable may be sold by the corporation and the proceeds thereof
distributed to the holders of scrip or warrants, or subject to any other conditions which the board of
directors may impose.
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nominees to see that they receive the same consideration as stockholders who have
their interests registered in their own names.1 
To illustrate the Proposed Transaction through a hypothetical, assume
Stockholder A owns fifteen shares of stock and Stockholder B owns forty-five shares
of stock.  If Avaya chooses to initiate a Reverse 1-for-30 Stock Split, Stockholder A
will possess a fractional interest equivalent to one-half a share of stock.  Stockholder
B will hold one whole share of Avaya stock and a fractional interest equivalent to one-
half a share.  Using the provisions of Section 155(1) or (2) of the Delaware General
Corporation Law,2 Avaya would cash out Stockholder A since he no longer possesses
a whole share of stock.  Stockholder A would no longer be an Avaya stockholder.
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Stockholder B will remain a stockholder because Avaya will not cash out the
fractional interest held by her.  Stockholder B's fractional interest remains attached to
a whole share of stock.  When Avaya executes the accompanying Forward 30-for-1
Stock Split, Stockholder B's interest in one and one-half shares will be converted into
forty-five shares of stock, the same amount that she held prior to the Transaction.
At the annual meeting, Avaya stockholders voted to authorize the board to
proceed with any one of the three alternative transactions.  Applebaum, a holder of
twenty-seven shares of Avaya stock, filed an action in the Court of Chancery to enjoin
the Reverse/Forward Split.  Under any one of the three alternatives Applebaum would
be cashed out because he holds less than thirty shares. 
Proceedings in the Court of Chancery
Applebaum asked the Court of Chancery to enjoin the Proposed Transaction,
alleging that Avaya’s treatment of fractional interests will not comport with the
requirements set forward in Title 8, Section 155 of the Delaware Code.  Applebaum
argued that Section 155 does not permit Avaya to issue fractional shares to some
stockholders but not to others in the same transaction.  Even if Avaya could issue
fractional shares selectively, Applebaum contended that the methods by which Avaya
plans to cash-out the smaller stockholders do not comply with subsections (1) and (2)
of Section 155.  
3 Applebaum v. Avaya, Inc., 805 A.2d 209 (Del.  Ch.  2002).
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After considering cross-motions for summary judgment, the Court of Chancery
denied Applebaum’s request for an injunction and held that the Reverse/Forward Split
would comply with Section 155 and dispose of the cashed-out stockholders’ interests
in a fair and efficient manner.3  Applebaum appeals the final judgment entered for the
defendants.  We affirm.
Issues on Appeal
Applebaum claims the Court of Chancery erred by:  (1) holding that Title 8,
Section 155 permits Avaya to issue fractional shares to the surviving stockholders but
not issue fractional shares to the cashed-out stockholders; (2) holding that Avaya can
combine the fractional interests and sell them on the open market; (3) holding that
Avaya can instruct nominees to participate in the Split even if a particular nominee
holds a sufficient amount of stock on behalf of all of its beneficial holders to survive
the Split; (4) granting summary judgment and holding that the payment of cash for
fractional interests based on a ten-day average of the trading price of Avaya stock
constitutes “fair value” under Section 155; and  (5) holding that the meaning of “fair
value” in Sections 155(2) is different from Section 262 and thus failing to value the
fractional shares as proportionate interests in a going concern.
Section 155 Does Not Prevent Avaya From Disposing of Fractional 
4  8 Del. C. § 155.  
5  Id.
-8-
Interests Selectively
Applebaum questions the board’s authority to treat stockholders differently by
disposing of the fractional interests of some stockholders but not others.  Applebaum
contends that Avaya will issue fractional shares in violation of Section 155.
According to this view of the transaction, during the one minute interval between the
two stock splits the corporation will not issue fractional shares to stockholders who
possess holdings below the minimum amount.  Those stockholders will be cashed out.
Stockholders who hold stock above the minimum amount, by contrast, will be issued
fractional shares that will be reconverted in the Forward Split into the same number
of whole shares owned by those stockholders before the Reverse Split. 
Applebaum argues that Section 155 prevents Avaya from achieving this
disparate result by providing that:
A corporation may, but shall not be required to, issue fractions of a
share.  If it does not issue fractions of a share, it shall (1) arrange for the
disposition of fractional interests by those entitled thereto, (2) pay in
cash the fair value of fractions of a share as of the time when those
entitled to receive such fractions are determined. . . .4
Applebaum reads Section 155 to mean that Avaya can employ the cash-out methods
provided in Section 155 only if the corporation “does not issue fractions of a share.”5
6  Telxon Corp. v. Meyerson, 802 A.2d 257, 261 (Del. 2002).
7  Shares of stock are issued to provide a verifiable property interest for the residual claimants of the
corporation.  See Kalageorgi v. Victor Kamkin, Inc., 750 A.2d 531, 538 (Del. Ch. 1999) (stating that “Corporate
securities are a species of property right”) aff’d, 748 A.2d 913 (Del. 2000).  We do not believe Avaya must issue
fractional shares to recognize a property interest that, by the terms of the transaction, will last only sixty seconds.  
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This Court reviews de novo the Court of Chancery’s decision to grant Avaya’s
motion for summary judgment.6  We need not reach the merits of Applebaum’s
interpretation of Section 155 because he has based his argument on the flawed
assumption that Avaya will issue fractional shares.  Since the Reverse/Forward Split
is an integrated transaction, Avaya need not issue any fractional shares.  The initial
Reverse Split creates a combination of whole shares and fractional interests.  Avaya
will use either Section 155(1) or (2) to cash out the fractional interests of stockholders
who no longer possess a whole share of stock.  Fractional interests that are attached
to whole shares will not be disposed of.  Nor will they be represented by fractions of
a share.  Fractional shares are unnecessary because the surviving fractional interests
will be reconverted into whole shares in the Forward Split.7 
Applebaum correctly notes that Avaya stockholders are not treated equally in
the Proposed Transaction.  The disparate treatment, however, does not arise by issuing
fractional shares selectively.  It occurs through the selective disposition of some
fractional interests but not others.  The provisions of Section 155 do not forbid this
disparate treatment.  While principles of equity permit this Court to intervene when
8  See, e.g., Schnell v. Chris-Craft Indus., 285 A.2d 437, 439 (Del. 1971).
9  See Nixon v. Blackwell, 626 A.2d 1366, 1376 (Del. 1993) (“It is well established in our jurisprudence that
stockholders need not always be treated equally for all purposes.”); see also Unocal Corp. v. Mesa Petroleum Co., 493
A.2d 946, 957 (Del. 1985); Cheff v. Mathes, 199 A.2d 548, 554-56 (Del. 1964).
10  See, e.g.,  Williams v. Geier, 671 A.2d 1368, 1385 n.36 (Del. 1996) (noting “Directors and investors must
be able to rely on the stability and absence of judicial interference with the State’s statutory prescriptions”); Nixon, 626
A.2d at 1379-81(absent legislation there should be no “special, judicially-created rules for minority investors”);
American Hardware Corp. v. Savage Arms. Corp., 136 A.2d 690, 693 (Del. 1957) (rejecting argument based on an
interpretation that would “import serious confusion and uncertainty into corporate procedure”).
11  See Sinclair v. Levien, 280 A.2d 717, 720 (Del. 1971) (board action presumed valid if it “can be attributed
to any rational business purpose”); see also Williams, 671 A.2d at 1377-78 (board action in recommending charter
amendment for stockholder action covered by business judgment rule in the absence of rebuttal demonstrating violation
of fiduciary duty).
12  See Grimes v. Alteon Inc., 804 A.2d 256,  266 (Del. 2002) (noting that corporations “should have the
freedom to enter into new and different forms of transactions”) (citations omitted).
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technical compliance with a statute produces an unfair result,8 equity and equality are
not synonymous concepts in the Delaware General Corporation Law.9  Moreover, this
Court should not create a safeguard against stockholder inequality that does not appear
in the statute.10  Here there is no showing that Applebaum was treated inequitably.
From all that appears on this record, the proposed transaction was designed in good
faith to accomplish a rational business purpose—saving transaction costs.11   
Our jurisprudence does not prevent Avaya from properly using Section 155 in
a creative fashion that is designed to meet its needs as an on-going enterprise.12 The
subsections listed in Section 155 merely require the corporation to compensate its
stockholders when it chooses not to recognize their fractional interests in the form of
13  See WARD, WELCH & TUREZYN, FOLK ON THE DELAWARE GENERAL CORPORATION LAW
§ 155.1 (4th ed. 2002) (stating “a corporation may refuse to issue share fractions . . . [but] If the corporation chooses to
ignore share fractions, it must elect one of the three alternatives authorized by Section 155. . .”).
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fractional shares.13  Based upon this record, we conclude that Avaya is free to
recognize the fractional interests of some stockholders but not others so long as the
corporation follows the procedures set forth in Section 155.
Avaya May Proceed with Any of Its Alternative Plans to Dispose 
of the Fractional Interests 
The balance of Applebaum’s appeal challenges the alternative methods by
which Avaya proposes to dispose of the fractional interests.  The Court of  Chancery
concluded that Avaya could proceed under Section 155(1) by aggregating the
fractional interests and selling them on behalf of the cashed-out stockholders.  The
Court also held that Avaya could employ Section 155(2), which requires payment of
the “fair value” of the fractional interests, by paying the cashed-out stockholders an
amount based on the average trading price of Avaya stock.  We agree with the
decision of the Court of Chancery and address separately the issues based on each
subsection of the statute.  
Section 155(1) Permits Avaya to Sell the Factional Interest on Behalf 
of the Stockholders 
The stockholders have authorized Avaya to compensate the cashed-out
stockholders by combining their fractional interests into whole shares and then selling
14  8 Del. C. § 155(1).
15  Applebaum provides the following example:  “[I]f the Minimum Number is 30, a holder of 10 pre-split
shares will have a fractional interest of 1/3 of a share upon consummation of the Reverse Split.  One minute later, the
whole shares with their attendant fractional shares are multiplied by 30 in the Forward Split.  If the 1/3 share fractional
interest is not also multiplied by 30 in the Forward Split, it would be reduced to 1/90th of a post-Forward Split share.”
Appellant’s Br. at 23 n.10.  
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them on the stockholders’ behalf.  Section 155(1) permits Avaya to “arrange for the
disposition of fractional interests by those entitled thereto.”14 
Applebaum claims that Avaya cannot use Section 155(1) because the
corporation will sell whole shares rather than “fractional interests.”  According to this
rendition of the transaction, the fractional interests held by the targeted stockholders
must  be  reconverted   into  whole  shares  in  the  Forward  Split.  Otherwise, their
fractional interests will be diluted.15  Avaya must reconvert the interests back to their
initial value as whole shares in order to sell the combined fractional interests.  Thus,
Avaya would be selling whole shares rather than fractional interests. 
Applebaum’s argument incorrectly assumes that Avaya must issue fractions of
a share in the Proposed Transaction.  After the Reverse Split takes place, the
stockholders holding shares below the minimum amount will be cashed out.  The
fractional interests will not be represented as shares and are therefore not involved in
the Forward Split.  Avaya will then aggregate the fractional interests and repackage
them as whole shares which the corporation will sell on the open market. 
16  Applebaum, 805 A.2d at 218.
17  Id.
18  See DREXLER, BLACK & SPARKS, DELAWARE CORPORATION LAW AND PRACTICE, § 17.04
(2001).
19  BALOTTI & FINKELSTEIN, DELAWARE LAW OF CORPORATIONS AND BUSINESS
ORGANIZATIONS,  § 5.15 (2002).
-13-
The statute does not mandate any set procedure by which the fractional interests must
be disposed of so long as those interests are sold in a manner that secures the
proportionate value of the cashed-out holdings.   
Applebaum also contends that Avaya cannot sell the fractional interests on
behalf of the cashed-out stockholders.  If Avaya sells the interests for the
stockholders, Applebaum argues that the corporation will not comply with Section
155(1) because the interests are not disposed of by “those entitled thereto.”  As the
Vice Chancellor noted, Applebaum presents a strained reading of Section 155(1).16
The Court of Chancery correctly reasoned that “In the eyes of equity, such sales would
be ‘by’” the stockholders.17 
Applebaum’s interpretation also ignores the corporation’s responsibility under
Section 155(1) to “arrange” for the disposition of fractional interests.  Since fractional
shares cannot be listed on the major stock exchanges,18 the corporation must arrange
for their aggregation in order to sell them.19  Aggregation is normally performed by
affording to the stockholder an election to sell the fractional share or to
purchase an additional fraction sufficient to make up a whole share.  The
20  Id.
21  See Applebaum, 805 A.2d at 218.
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elections are forwarded to a trust company or other agent of the
corporation who matches up the purchases and sales and issues
certificates for the whole shares or checks for payment of the fractional
shares. . . .”20  
The general practice requires the corporation to act as an intermediary to package the
fractional interests into marketable shares.  If the corporation were not permitted to
do so, the fractional interests of the cashed-out stockholders would be dissipated
through the transaction costs of finding other fractional holders with whom to
combine and sell fractional interests in the market.21 
22  See O’Malley v. Boris, 742 A.2d 845, 849 (Del. 1999). 
23  Applebaum, 805 A.2d at 220.
24  See Enstar Corp. v. Senouf, 535 A.2d 1351, 1354 (Del. 1987) (“The legal and practical effects of having
one’s stock registered in street name cannot be visited upon the issuer.  The attendant risks are those of the stockholder
. . . .”).
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Avaya May Instruct Nominees to Execute the Proposed Transaction 
on Behalf of the Beneficial Owners
To execute the Reverse/Forward Split, Avaya stated in its proxy statement that
“Nominees will be instructed to effect the Reverse/Forward Split for their beneficial
holders.”  Applebaum argues that nominees cannot be forced to elect to receive cash
in exchange for the fractional interests held by their beneficial holders if the
nominee’s combined holdings for all of its beneficial holders exceeds the minimum
amount of stock necessary to survive the Reverse Split. 
Applebaum misstates the responsibility of a corporation to stockholders who
hold their interests through nominees and brokers.  Nominees, as agents of the
beneficial owners,22 owe a duty to take the necessary steps to afford the true owners
the opportunity to realize the benefits of the Proposed Transaction.  The Court of
Chancery properly held that the Reverse/Forward Split could operate at the level of
the corporate ledger.23  Avaya is not required to take any additional actions to effect
the transaction for stockholders who own their stock through a nominee.24  The
25  See, e.g., Enstar, 535 A.2d at 1354 (stating that the holder of record must demand appraisal rights); see also
8 Del. C. § 219(c) (“The stock ledger shall be the only evidence as to who are the stockholders entitled to examine the
stock ledger, the list required by this section or the books of the corporation, or to vote in person or by proxy at any
meeting of stockholders.”).
26  Applebaum, 805 A.2d at 220-21.
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beneficial stockholders are responsible for making proper arrangements with their
agents.25 
Applebaum also raises a disclosure issue related to the instructions for
beneficial owners.  The proxy statement informs stockholders that nominees “will be
instructed to effect” the transaction.  Applebaum argues that this statement is
misleading because, as explained above, he contends that a nominee has the option
either to effect the split or refrain from doing so if the aggregate amount of the
beneficial holders' stock is sufficient to survive the Reverse Split.  The proxy
statement places the beneficial owners on notice that they must make arrangements
with their nominees to receive payment from the transaction.26  The proxy statement
is not misleading because it accurately states that the nominees must execute the
transaction on behalf of the beneficial holders. 
The Ten-Day Trading Average by which Avaya Proposes to Compensate the
Cashed-Out Stockholders Constitutes “Fair Value” under Section 155(2)
As an alternative to selling the fractional interests on behalf of the stockholders,
Avaya may opt to pay the stockholders cash in an amount based on the trading price
of Avaya stock averaged over a ten-day period preceding the Proposed Transaction.
27  8 Del. C. § 155(2).
28  See e.g., 8 Del. C. § 262(h) ("In determining . . . fair value," in an appraisal proceeding, "the Court shall take
into account all relevant factors."); Smith v. Van Gorkom, 488 A.2d 858, 876 (Del. 1985) (holding that a decision by
the board of directors to approve a merger did not fall within the proper exercise of business judgment because the
directors failed to consider the intrinsic worth of the corporation where the stock traded at a depressed market value).
29  Cf. 8 Del. C. § 262(b)(1) (denying appraisal rights for stock listed on a national securities exchange,
interdealer quotation system by the National Association of Securities Dealers, Inc. or held of record by more than 2,000
holders);  Revlon, Inc. v. MacAndrews & Forbes Holdings, 506 A.2d 173, 182 (Del. 1986) (noting that an auction for
the sale of a corporation is an appropriate method by which to secure the best price for the stockholders);  Baron v.
Pressed Metals of America, Inc., 123 A.2d 848, 854 (Del. 1956) (noting that the “best price” a corporation could hope
to obtain for the sale of a corporate asset “was what someone would be willing to pay" for it).
30  Applebaum, 805 A.2d at 215-16.
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To do so, Avaya relies on Section 155(2), which provides that a corporation may “pay
in cash the fair value of fractions of a share as of the time when those entitled to
receive such fractions are determined.”27
The corporation owes its cashed-out stockholders payment representing the
“fair value” of their fractional interests.  The cashed-out stockholders will receive fair
value if Avaya compensates them with payment based on the price of Avaya stock
averaged over a ten-day period preceding the Proposed Transaction.  While market
price is not employed in all valuation contexts,28 our jurisprudence recognizes that  in
many  circumstances  a  property  interest  is  best  valued  by the amount a buyer will
pay for it.29  The Vice Chancellor correctly concluded that a well-informed, liquid
trading market will provide a measure of fair value superior to any estimate the court
could impose.30
31  Chalfin v. Hart Holdings Co., 1990 WL 181958 (Del. Ch.).  
32  Metropolitan Life Ins. Co. v. Aramark Corp., 1998 Del. Ch. LEXIS 70 (Del. Ch.).
33  Chalfin, 1990 WL 181958 at *4-5 (Del. Ch.).
34  Id. at *1.  
35  See Seagraves v. Ustadt Prop. Co., 1996 WL 159626 (Del. Ch.) at *7 (“To be reliable, market price must
be established in an active market.”); Cf. Gimbel v. Signal Companies, Inc., 316 A.2d 599, 615, (Del. Ch. 1974) (holding
that an expert valuation of oil and gas properties should have been updated to account for market fluctuations) aff’d 316
A.2d 619 (Del. 1974).  
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Applebaum relies on two instances where the Court of Chancery intimated that
a Section 155(2) valuation may be similar to a going concern valuation employed in
an appraisal proceeding.  In Chalfin v. Hart Holdings Co.,31 the Court of Chancery
rejected a market price offered by a majority stockholder because the stock was not
traded in an active market.  In Metropolitan Life Ins. Co. v.  Aramark Corp.,32 the
Court of Chancery declined to apply a private company discount presented by a
controlling stockholder seeking to squeeze out the minority stockholders.  Neither
case applies here.  
The court cannot defer to market price as a measure of fair value if the stock has
not been traded actively in a liquid market. 33  In Chalfin, for example, the Court of
Chancery held that the controlling stockholder could not offer as “fair value” in a
reverse stock split the same amount alleged to be the past trading value because the
stock had not been publicly traded for "some time."34  The “market price” offered by
the controlling stockholder was based on stale information.35  An active trading market
36  Appellant’s Br. at 13.  
37See DREXLER et. al. supra n.18 § 17.04 (2001) (stating “Merger agreements frequently provide for the
payment of cash based on trading prices during an agreed period.  While this technically may not key to an exact time
when the persons entitled to fractions are determined . . . it is thought to better reflect fair values.”). 
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did not exist to monitor the corporation's performance.  Thus, a more thorough
valuation would have been necessary.  
Avaya stock, by contrast, is actively traded on the NYSE.  The concerns noted
in Chaflin are not pertinent to the Proposed Transaction because the market continues
to digest information currently known about the company.  The value of Avaya’s
stock is tested daily through the purchase and sale of the stock on the open market. 
In a related argument, Applebaum contends that the trading price cannot
represent fair value because the stock price is volatile, trading at a range of prices
from $13.70 per share to $1.12 per share over the past year.36  The volatility in trading
does not necessarily mean that the market price is not an accurate indicator of fair
value.  Avaya stock is widely-held and actively traded in the market.   The ten-day
average has been recognized as a fair compromise that will hedge against the risk of
fluctuation.  Corporations often cash out fractional interests in an amount based on the
average price over a given trading period.37 
Applebaum also misunderstands the appropriate context for which a going-
concern valuation may be necessary under Section 155(2).  In both Chalfin and
Aramark, the Court of Chancery recognized that a transaction employing Section 155
38  Chalfin, 1999 WL 181958 at *3 n.3 (noting that market price might satisfy the fair value requirement under
Section 155(2) but not “where the market price was set by the issuer company, acting as the primary (if not the sole)
buyer”); Aramark, 1998 Del. Ch. LEXIS 70 at *8 (going concern valuation is necessary when the controlling
stockholder is performing the “functional equivalent” of a squeeze-out merger).  
39  Weinberger v. UOP, Inc., 457 A.2d 701, 710 (Del. 1983), (“Given the absence of any attempt to structure
this transaction on an arm’s length basis, [the controlling stockholder] . . . cannot escape the effects of the conflicts it
faced . . .”). 
40  Chalfin, 1999 WL 181958 at *3 n.3.  Cf. Van Gorkom, 488 A.2d at 877 (holding that merger price offered
by CEO in a leveraged buyout could not be accepted as adequate without further investigation since the offer only
calculated the amount that would allow the CEO to perform the transaction); Weinberger 457 A.2d at 711 (holding that
outside directors for subsidiary company could not rely solely on fairness report prepared by individuals associated with
the parent corporation to determine a fair price for the subsidiary’s stock in a squeeze-out merger).
41  See, e.g., Glassman v. Unocal Exploration Corp., 777 A.2d 242, 248 (De. 2001) (a fair value determination
must be based on “all relevant factors” in a short-form merger because the transaction presented by the controlling
stockholder may be “timed to take advantage of a depressed market, or a low point in the company’s cyclical earnings,
or to precede an anticipated positive development . . . .”).  See also Robert B. Thompson, Exit, Liquidity, and Majority
Rule: Appraisal’s Role in Corporate Law, 84 Geo. L. J. 1, 36 (1995) (arguing that an appraisal valuation may be
necessary in a squeeze-out context if  “the minority does not have a choice and is being forced out, perhaps because of
an anticipated increase in value that will only become visible after the transaction, [in which case] exclusion [of the
minority stockholders] can easily become a basis for oppression of the minority”).  
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may warrant a searching inquiry of fair value if a controlling stockholder initiates the
transaction.38  When a controlling stockholder presents a transaction that will free it
from future dealings with the minority stockholders, opportunism becomes a
concern.39  Any shortfall imposed on the minority stockholders will result in a transfer
of value to the controlling stockholder.  The discount in value could be imposed
deliberately40 or could be the result of an information asymmetry where the
controlling stockholder possesses material facts that are not known in the market.41
Thus, a Section 155(2) inquiry may resemble a Section 262 valuation if the controlling
42  Chalfin, 1990 WL 181958 at *3.  
43  Aramark, 1998 Del. Ch. LEXIS at *8.
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stockholder will benefit from presenting a suspect measure of valuation, such as an
out-dated trading price,42 or a wrongfully imposed  private company discount.43 
Although the Reverse/Forward Split will cash out smaller stockholders, the
transaction will not allow the corporation to realize a gain at their expense. Unlike the
more typical “freeze-out” context, the cashed-out Avaya stockholders may continue
to share in the value of the enterprise.  Avaya stockholders can avoid the effects of the
proposed transaction either by purchasing a sufficient amount of stock to survive the
initial Reverse Split or by simply using the payment provided under Section 155(2)
to repurchase the same amount of Avaya stock that they held before the transaction.
The Reverse/Forward Split merely forces the stockholders to choose
affirmatively to remain in the corporation.  Avaya will succeed in saving
administrative costs only if the board has assumed correctly that the stockholders who
received a small interest in the corporation through the Lucent spin off would prefer
to receive payment, free of transaction costs, rather than continue with the
corporation.  The Transaction is not structured to prevent the cashed-out stockholders
from maintaining their stakes in the company.  A payment based on market price is
44  8 Del. C. § 262(a) (providing that “Any stockholder of a corporation of this State who holds shares of stock
on the date of the making of a demand pursuant to subsection (d) . . . who continuously holds such shares through the
effective date of the merger or consolidation . . . who has neither voted in favor of the merger or consolidation nor
consented thereto . . . shall be entitled to an appraisal by the Court of Chancery of the fair value of the stockholder’s
shares of stock. . . .).
45  See 2B SINGER, STATUTES AND STATUTORY CONSTRUCTION, § 51.02 (6th ed. 2000).
46  See Cavalier Oil, Corp. v.  Harnett, 564 A.2d 1137, 1145 (Del. 1989).
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appropriate because it will permit the stockholders to reinvest in Avaya, should they
wish to do so.  
The Meaning of “Fair Value” under Section 155(2) is not Identical 
to the Concept of “Fair Value” in Section 262
The Court of Chancery correctly interpreted “fair value” in Section 155 to have
a meaning independent of the definition of “fair value” in Section 262 of the Delaware
General Corporation Law.44  Relying on the maxim that the same words used in
different sections must be construed to have the same meaning,45 Applebaum argues
that “fair value” under Section 155(2) requires the court to perform a valuation similar
to an appraisal proceeding.  Borrowing from appraisal concepts that require that shares
of stock be valued as proportionate interests in a going concern, Applebaum contends
that the average trading price would be inadequate because the market price possesses
an inherent discount that accounts for the holder’s minority stake in the company.46
47  Hariton v. Arco Electronics, Inc., 188 A.2d 123, 124 (Del. 1963) (“[t]he general theory of the Delaware
Corporation Law that action taken pursuant to the authority of the various sections of that law constitute acts of
independent legal significance and their validity is not dependent on other sections of the Act.”) (quoting Langfelder
v. Universal Laboratories, 68 F. Supp. 209, 211 (D. Del. 1946)).
48  56 Del. Laws, ch. 50.
49  60 Del. Laws, ch. 371.
50  See Weinberger, 457 A.2d at 703. 
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The Delaware General Assembly could not have intended Section 155(2) to
have the same meaning as the fair value concept employed in Section 262.47  The
reference to fair value in Section 155 first appeared in 1967.48  The General Assembly
did not place the term fair value in Section 262 until 1976.49  Furthermore, the case
law developing the concept of fair value under the appraisal statute did not acquire its
present form until this Court discarded the Delaware block method and underscored
the necessity of valuing a corporation as a going concern.50  This Court has not
suggested similar valuation guidelines for the right to receive “fair value” under
Section 155(2).  Finally, Section 262(b)(2)(c) expressly excludes fractional interests
from the appraisal remedy when the stock is traded on a national exchange.  When
applied in the context of a merger or consolidation, Applebaum's interpretation of "fair
value" under Section 155(2) would accord the stockholder of a constituent corporation
51  Section 262(b)(1) denies appraisal rights to stockholders of a merging corporation if their stock is listed on
a national securities exchange, interdealer quotation system, or held of record by more than 2,000 holders.   8 Del. C.
§ 262(b)(1).  Similarly, under Section 262(b)(2)(c), those same stockholders are not afforded an appraisal right for cash
they receive "in lieu of fractional shares" of the stock.  8 Del. C. § 262(b)(2)(c).
52  657 A.2d 254, 258 (Del. 1995); see also WARD et. al. supra n.13 § 262.1 (“Delaware recognizes the
stockholders’ appraisal right only in the case of a merger or consolidation.”); see also Glassman, 777 A.2d at  247
(discussing short-form mergers authorized by Title 8, Section 253 of the Delaware Code and noting that appraisal is the
appropriate remedy for the inability to block the transaction).    
53  See Paskill Corp. v. Alcoma Corp., 747 A.2d 549, 553 (Del. 2000) (discussing a recent analysis that justifies
appraisal rights as a method by which proponents of a merger are forced to internalize the net benefits and costs of
engaging in a“risk altering transaction”) (quoting Peter V. Letsou, The  Role  of  Appraisal  in  Corporate  Law, 39 B.C.
L. Rev. 1121, 1123-24 (1998)).
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an appraisal of fractional interests to which the stockholder is not entitled under the
"market out" exception provided in Section 262.51
As this Court noted in Alabama By-Products v. Cede & Co., the right to an
appraisal   is  a  narrow  statutory  right  that  seeks  to  redress  the  loss  of  the
stockholder’s ability under the common law to stop a merger.52 The Reverse/Forward
Split permitted under Section 155 does not present the same problem and is ill-suited
for the same solution provided for in Section 262.  
The valuation of a stockholder’s interest as a “going concern” is necessary only
when the board’s proposal will alter the nature of the corporation through a merger.
When a corporation merges with another corporation, the dissenting stockholder is
entitled to the value of the company as a going concern because the nature of the
corporation’s future “concern” will be vastly different.53  In a merger requiring an
appraisal, the dissenting stockholder’s share must be measured as a proportionate
54  See Cavalier Oil, 564 A.2d at 1145 ("[T]o fail to accord to a minority shareholder the full proportionate
value of his shares imposes a penalty for lack of control, and unfairly enriches the majority shareholder who may reap
a windfall from the appraisal process by cashing out a dissenting shareholder, a clearly undesirable result.").
55  Applebaum, 805 A.2d at 217.
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interest in a going concern because the proponents of the merger will realize the full
intrinsic worth of the company rather than simply the market price of the stock.  Thus,
when a minority stockholder is confronted with a freeze-out merger, the Section 262
appraisal process will prevent the proponents of the merger from “reaping a windfall”
by placing the full value of the company as a going concern into the merged entity
while compensating the dissenting stockholder with  discounted consideration.54 
Avaya will not capture its full going-concern value in the Reverse/Forward
Split.  As the Vice Chancellor noted, if the cashed-out stockholders were awarded the
value of the company as a going concern, they, rather than the corporation, would
receive a windfall.  The cashed-out stockholders could capture the full proportionate
value of the fractional interest, return to the market and buy the reissued stock at the
market price, and realize the going concern value a second time should Avaya ever
merge or otherwise become subject to a change of control transaction.55  
Conclusion
The judgment of the Court of Chancery is affirmed.