Opinion ID: 2068544
Heading Depth: 1
Heading Rank: 5

Heading: Selecting The Most Appropriate Alternative

Text: The four alternative possibilities having been identified, the question then becomes: which remedy is the most appropriate  the one ordered by the Court of Chancery or one of the three alternative forms? To decide that issue, we must first answer a predicate question: by what analytical standard do we determine which remedial alternative is optimal? We conclude that the optimal alternative would be the remedy that best effectuates the policies underlying the short form merger statute (Section 253), the appraisal statute (Section 262) and the Glassman decision, taking into account considerations of practicality of implementation and fairness to the litigants. A reasoned application of that standard permits the remedial alternatives to be ranked in an objective and transparent way. Applying that standard leads us to conclude that the fourth alternative would merit the lowest priority. Under that alternative, a violation of the disclosure requirement would render Glassman inapplicable and deprive the majority stockholder fiduciary of the benefit of Glassman 's limited review and exclusive remedy. In that setting (to reiterate), the minority shareholders would be entitled to the same remedies as are available in a fiduciary duty class action challenging a long form merger. The strongest argument favoring this approach would run as follows: under Glassman, full disclosure of all material facts is a necessary condition for the fiduciary to enjoy Glassman's limited review and exclusive appraisal remedy. Therefore, a violation of that disclosure condition should deprive the fiduciary of those benefits. That argument, although unassailable in terms of logic and equity, [23] is flawed in one highly important respect. To accept it would disregard the intent of the General Assembly, as described in Glassman and Stauffer v. Standard Brands, Incorporated, [24] that in a legally valid, non-fraudulent, short form merger the minority shareholders' remedy should be limited to an appraisal. Moreover, validating such an approach would disserve the purpose of Glassman 's disclosure requirement, which is to enable the minority stockholders to make an informed decision whether or not to seek an appraisal. A remedy that sidesteps appraisal altogether would frustrate that purpose. Unlike this approach, the remaining three alternative remedies would give effect (albeit in varying degrees) to that legislative intent. Therefore, in the hierarchy those alternative remedies should rank above the one that abjures appraisal. That observation brings into focus a second alternative  the replicated appraisal remedy that would duplicate precisely the sequence of events and requirements of the appraisal statute. Under that approach, the minority shareholders would receive a supplemental disclosure, to enable them to make an informed decision whether or not to elect an appraisal. Shareholders who elect that remedy must then make a formal demand for an appraisal, and then remit to the corporation their stock certificates and all the merger consideration they received. This approach would place the minority shareholders in the situation they would find themselves had they received proper disclosure to begin with. The strongest argument favoring this alternative is that it would give maximum effect to the legislative intent recognized in Glassman. The flaw of this approach, however, is that it would effectuate that legislative intent at an unacceptable cost measured in terms of practicality of application and fairness to the minority. In Gilliland, the Court of Chancery so recognized, implicitly acknowledging the impracticality of such an approach by refusing to order a replicated appraisal remedy: The opt-in procedures to be followed, however, will not be as stringent as those under the statute. For example, the court will not require beneficial or street name owners to demand quasi-appraisal through their record holder. The court is concerned that, given the substantial passage of time since the merger, it would be difficult for stockholders to secure the cooperation of the former record holders or nominees needed to perfect demand in accordance with the statute. Instead, stockholders seeking to opt-in will need to provide only proof of beneficial ownership of [their] shares on the merger date. [25] The Gilliland court also recognized (again, implicitly) that it would be unfair to require shareholders who desire an appraisal to remit the entire merger consideration they received to the corporation, as would occur in a replicated appraisal. Instead, the court required only that those stockholders who choose to participate in the action to pay into escrow a portion of the merger consideration they have already received. [26] The Gilliland court thereby acknowledged the unfairness of requiring the minority stockholders to bear the risk of the corporation's creditworthiness, which would result from their having to pay back a portion of the merger proceeds to the company. Instead, the court ordered that the proceeds be placed into an escrow account, with the escrowed funds representing only a portion of the merger consideration the minority actually received. Implicit in the Gilliland remedy is the recognition that it is unfair to the minority shareholders, on whose behalf significant litigation expense and effort were successfully devoted, to limit their relief to requiring the fiduciary merely to fulfill the disclosure obligation it had all along. A remedy limited to awarding a second statutory appraisal would deny the minority any credit for that expense and effort, after having been forced to prosecute that litigation solely because the controlling shareholder had violated its fiduciary duty. A replicated appraisal remedy would also give controlling shareholders little incentive to observe their disclosure duty in future cases, since the cost of the remedy to the controllers would be negligible. Both in Gilliland and in this case the Court of Chancery eschewed that approach, concluding instead that the appropriate remedy should be a quasi appraisal. Both parties agree with that conclusion, and so do we. That requires us to choose between the two dueling forms of quasi-appraisal advocated by the parties on this appeal. Both forms would entitle the minority stockholders to supplemental disclosure enabling them to make an informed decision whether to participate in the lawsuit or to retain the merger proceeds. Both forms would entitle those who elect to participate to seek a recovery of the difference between the fair value of their shares and the merger consideration they received, without having to establish the controlling shareholders' personal liability for breach of fiduciary duty. The difference between the two quasi-appraisal approaches is that under the defendants' approach (which the Court of Chancery approved), the minority shareholders who elect to participate would be required to opt in and to escrow a prescribed portion of the merger proceeds they received. Under the plaintiff's approach, all minority stockholders would automatically become members of the class without being required to opt in or to escrow any portion of the merger proceeds. As thus narrowed, the final issue may be stated as follows: under the standard we have applied, which remedy is the more appropriate  the one that imposes the opt in and partial escrow requirements or the one that does not? Considerations of utility and fairness impel us to conclude that the latter is the more appropriate remedy for the disclosure violation that occurred here. Because neither the opt-in nor the escrow requirement is mandated as a matter of law and because those requirements involve different equities, [27] we analyze each requirement separately. We start with the opt in issue. The approach adopted by the Court of Chancery requires the minority shareholders to opt in to become members of the plaintiff class. The other choice would treat those shareholders automatically as members of the class  that is, as having already opted in. Those shareholders would continue as members of the class, unless and until individual members opt out after receiving the remedial supplemental disclosure and the Rule 23 notice of class action informing them of their opt out right. [28] From the minority's standpoint, the first alternative is potentially more burdensome than the second, because shareholders that fail either to opt in or to opt in within a prescribed time, forfeit the opportunity to seek an appraisal recovery. On the other hand, structuring the remedy as an opt out class action avoids that risk of forfeiture, and thus benefits the minority shareholders. To the corporation, however, neither alternative is more burdensome than the other. Under either alternative the company will know at a relatively early stage which shareholders are (and are not) members of the class. Given these choices, it is self evident which alternative is optimal. As between an opt in requirement that would potentially burden shareholders desiring to seek an appraisal recovery but would impose no burden on the corporation, and an opt out requirement that would impose a lesser burden on the shareholders but again no burden on the corporation, the latter alternative is superior and is the remedy that the trial court should have ordered. That leaves the requirement that the minority shareholders electing to participate in the quasi-appraisal must escrow a portion of the merger proceeds that they received. The rationale for this requirement, as stated in Gilliland, is to mimic, at least in small part, the risks of a statutory appraisal ... to promote well-reasoned judgments by potential class members and to avoid awarding a `windfall' to those shareholders who made an informed decision [after receiving the original notice of merger] to take the cash rather than pursue their statutory appraisal remedy. [29] The defendants-appellees argue that it is fair and equitable to require the minority shareholders to escrow some portion of the merger proceeds. Otherwise (defendants say), the shareholders would have it both ways: they could retain the merger proceeds they received and at the same time litigate to recover a higher amount  a dual benefit they would not have in an actual appraisal. It is true that the minority shareholders would enjoy that dual benefit. But, does that make it inequitable from the fiduciary's standpoint? We think not. No positive rule of law cited to us requires replicating the burdens imposed in an actual statutory appraisal. Indeed, our law allows the minority to enjoy that dual benefit in the related setting of a class action challenging a long form merger on fiduciary duty grounds. In that setting the shareholder class members may retain the merger proceeds and simultaneously pursue the class action remedy. The defendants cite no case authority, nor are we aware of any, holding that that in the long form merger context that benefit is inequitable to the majority shareholder accused of breaching its fiduciary duty. Lastly, fairness requires that the corporation be held to the same strict standard of compliance with the appraisal statute as the minority shareholders. Our case law is replete with examples where dissenting minority shareholders that failed to comply strictly with certain technical requirements of the appraisal statute, were held to have lost their entitlement to an appraisal, [30] and, consequently, lost the opportunity to recover the difference between the fair value of their shares and the merger price. These technical statutory violations were not curable, so that irrespective of the equities the unsuccessful appraisal claimant could not proceed anew. That result effectively allowed the corporation to retain the entire difference between fair value and the merger price attributable to the shares for which appraisal rights were lost. The appraisal statute should be construed even-handedly, not as a one-way street. Minority shareholders who fail to observe the appraisal statute's technical requirements risk forfeiting their statutory entitlement to recover the fair value of their shares. In fairness, majority stockholders that deprive their minority shareholders of material information should forfeit their statutory right to retain the merger proceeds payable to shareholders who, if fully informed, would have elected appraisal. [31] In cases where the corporation does not comply with the disclosure requirement mandated by Glassman, the quasi-appraisal remedy that operates in the fairest and most balanced way and that best effectuates the legislative intent underlying Section 253, is the one that does not require the minority shareholders seeking a recovery of fair value to escrow a portion of the merger proceeds they received. We hold, for these reasons, that the quasi-appraisal remedy ordered by the Court of Chancery was legally erroneous in the circumstances presented here.