Opinion ID: 1916444
Heading Depth: 1
Heading Rank: 4

Heading: Whether Cinerama's Subsequent Fraud Action Is Foreclosed by its Original Election of An Appraisal Remedy

Text: Applying these principles to the record before us, we find the Chancellor was clearly correct in refusing to dismiss Cinerama's fraud action. Given the distinctive nature of the remedies available to a cashed-out shareholder, the Chancellor properly declined to find Cinerama to lack standing to pursue its fraud claim. To rule that Cinerama, having elected to pursue an appraisal remedy under section 262, without apparent knowledge of a claim of fraud in the merger, was foreclosed from asserting a later-discovered claim of fraud in the merger, would have been clearly contrary to the teachings of Weinberger and Rabkin. Defendants' reliance upon Dofflemyer v. W.F. Hall Printing Co., D.Del., 558 F.Supp. 372 (1983), and Braasch v. Goldschmidt, Del.Ch., 199 A.2d 760 (1964), is misplaced. Dofflemyer and Braasch are decisions that were based on the doctrine that, by demanding appraisal, a former shareholder elects to withdraw from the corporate enterprise and take the value of his stock, and, as a result, is divested of the rights appertaining to his shares. Southern Production Co. v. Sabath, Del. Supr., 87 A.2d 128, 134 (1952). Dofflemyer, Braasch, and Southern derive from Taormina v. Taormina Corp., Del.Ch., 78 A.2d 473 (1951), a shareholder derivative suit representing application of Court of Chancery Rule 23.1. As the Trial Court recognized, procedural requirements of standing developed to control derivative actions have no relevance to individual shareholder suits claiming a private wrong. [10] Standing to pursue a derivative claim for injury to the corporate entity should not be confused with the right of a former shareholder claimant to assert a timely filed private cause of action premised upon a claim of unfair dealing, illegality, or fraud. No one would assert that a former owner suing for loss of property through deception or fraud has lost standing to right the wrong that arguably caused the owner to relinquish ownership or possession of the property. The Chancellor correctly equated the right of a shareholder who loses share membership through misrepresentation, conspiracy, fraud, or breach of fiduciary duty to seek redress with the right of a shareholder who dissents from a merger and seeks appraisal of his shares to seek redress after discovery of allegedly wrongful conduct. Fairness and consistency require equal recourse for a former shareholder who accepts a cash-out offer in ignorance of a later-discovered claim against management for breach of fiduciary duty and a shareholder who discovers such a claim after electing appraisal rights. Moreover, policy considerations militate against foreclosing a shareholder electing appraisal rights from later bringing a fraud action based on after-discovered wrongdoing in the merger. Experience has shown that the great majority of minority shareholders in a freeze-out merger accept the cash-out consideration, notwithstanding the possible existence of a claim of unfair dealing, due to the risks of litigation. See Joseph v. Shell Oil Co., Del.Ch., 498 A.2d 1117, 1122 (1985). With the majority of the minority shareholders tendering their shares, only shareholders pursuing discovery during an appraisal proceeding are likely to acquire the relevant information needed to pursue a fraud action if such information exists. Such shareholders, however, would not have any financial incentive to communicate their discovered claim of wrongdoing in the merger to the shareholders who tendered their shares for the consideration offered by the majority and, by tendering, have standing to file suit. Thus, to bar those seeking appraisal from asserting a later-discovered fraud claim may effectively immunize a controlling shareholder from answering to a fraud claim. Defendants assert that it is inconsistent (or unfair) to permit both the fraud action and the appraisal action to proceed simultaneously. This argument is misguided. Cinerama is not seeking (nor would our courts permit) inconsistent remedial relief, but rather is simply pleading alternative causes of action. In the instant case, the merger occurred. If the merger was properly consummated, then 8 Del.C. § 262 affords Cinerama a claim for the fair value of its Technicolor shares. See Felder v. Anderson, Clayton & Co., Del.Ch., 159 A.2d 278 (1960). If the merger was not lawfully effected, Cinerama should be entitled to recover rescissory damages, rendering the appraisal action moot. Based upon the appraisal/fraud distinctions found in Weinberger and Rabkin, policy concerns, and considerations of equity, as a matter of law we affirm the Court of Chancery's ruling denying defendant's motion to dismiss Cinerama's fraud action. Under the record before us, the Chancellor properly allowed Cinerama to pursue both a statutory appraisal remedy and its fraud action; therefore, the defendants' cross-appeal, asserting that Cinerama lacked standing to pursue its fraud action, fails.