Opinion ID: 1117163
Heading Depth: 1
Heading Rank: 11

Heading: Fraud, Misrepresentation, or Misconduct under Weinberger v. UOP, Inc., 457 A.2d 701 (Del. 1983)

Text: In addition to examining the fiduciary duties set forth in K.S.A. 56a-404, the district court in this case also applied the threshold set forth in a Delaware corporate merger case. In Weinberger v. UOP, Inc., 457 A.2d 701 (Del. 1983), minority shareholders in a subsidiary corporation challenged the cash-out merger by the corporate majority shareholder of the subsidiary. The majority shareholder corporation had established the buyout price without disclosing a feasibility study to the subsidiary indicating that a price in excess of what the corporation ultimately offered for the subsidiary's outstanding shares would have been a good investment for the corporation. In first discussing the burden of proof, the Supreme Court of Delaware found that a plaintiff challenging a cash-out merger must allege specific acts of fraud, misrepresentation, or other items of misconduct to demonstrate the unfairness of the merger terms to the minority. 457 A.2d at 703. The court explained: [E]ven though the ultimate burden of proof is on the majority shareholder to show by a preponderance of the evidence that the transaction is fair, it is first the burden of the plaintiff attacking the merger to demonstrate some basis for invoking the fairness obligation. . . . However, where corporate action has been approved by an informed vote of a majority of the minority shareholders, we conclude that the burden entirely shifts to the plaintiff to show that the transaction was unfair to the minority. [Citation omitted.] But in all this, the burden clearly remains on those relying on the vote to show that they completely disclosed all material facts relevant to the transaction. 457 A.2d at 703. The court also noted that [w]hen directors of a Delaware corporation are on both sides of a transaction, they are required to demonstrate their utmost good faith and the most scrupulous inherent fairness of the bargain [citation omitted] and that [t]he requirement of fairness is unflinching in its demand that where one stands on both sides of a transaction, he has the burden of establishing its entire fairness, sufficient to pass the test of careful scrutiny by the courts. [Citations omitted.] 457 A.2d at 710. The court found the concept of fairness has two basic aspects: fair dealing and fair price. Fair dealing questions when the transaction was timed, how it was initiated, structured, negotiated, disclosed to the directors, and how the approvals of the directors and the stockholders were obtained. Fair price relates to the economic and financial considerations of the proposed merger. 457 A.2d at 711. Under the facts of Weinberger, the court concluded that the transaction did not satisfy the concept of fair dealing amounting to a breach of fiduciary duty and remanded for consideration of the fair value of the shares. 457 A.2d at 703, 712, 714. While Weinberger is clearly not binding on this court, it is important to recognize that this court has recognized Delaware's entire fairness test concerning fair dealing and fair price under circumstances when a corporate board of directors' actions in a perceived threat of hostile takeover were not subject to the business judgment rule. See Burcham v. Unisom Bancorp. Inc., 276 Kan. 393, 421, 77 P.3d 130 (2003). Additionally, Kansas courts have a long history . . . of looking to the decisions of the Delaware courts involving corporation law, as the Kansas Corporation Code was modeled after the Delaware Code. Arnaud v. Stockholders State Bank, 268 Kan. 163, 165, 922 P.2d 216 (1999). The plaintiffs point to the application of Weinberger in Casey v. Brennan, 344 N.J. Super. 83, 780 A.2d 553 (2001), aff'd on other grounds 173 N.J. 177, 801 A.2d 245 (2002), where minority shareholders brought breach of fiduciary duty action against a bank's board of directors, which also consisted of its majority shareholders, seeking the fair value for their shares following a merger. The court found that even those shareholders who did not qualify as statutory dissenters still had the right to claim fair compensation for their shares in the context of a cash-out merger, as an incident of the fiduciary duty of the majority to treat the minority fairly. The court utilized the fair price and fair dealing standard from Weinberger, reasoning in relevant part: [W]here, as here, a shareholder claim of unfairness involves a corporate transaction in which the directors stand to realize a personal benefit by continuing as shareholders after paying the minority an unfairly low price, we have no hesitancy in concluding that the fiduciary responsibilities of the directors and of the corporation toward all shareholders impose upon them the burden of proving the transaction was not `unfair and inequitable' to plaintiffs. [Citation omitted.] 344 N.J. Super. at 108. In this case, the defendants argue that the plaintiffs have made no specific allegations of fraud, misrepresentation, or other items of misconduct so as to invoke a judicial inquiry into the fairness of the transaction. The plaintiffs contend that they established a prima facie case of self-dealing, unfairness, and breach of fiduciary duty on the part of the defendants and the defendants should therefore be held to the burden of proving the entire fairness of the transaction despite the absence of statutory appraisal rights. Aside from the fiduciary duties discussed above, the plaintiffs articulated at the summary judgment hearing that the fraud and misrepresentation took the form of intentionally concealing the business plan Via Christi was developing, selecting a process to exchange the plaintiffs' interests with those of other limited partners without providing statutory appraisal rights, and manipulating the valuation of the allegedly independent expert as to the valuation of the company. As discussed above, Via Christi's actions in planning the merger were in accord with the limited partnership agreement and the applicable Mixed Entity Merger statutes, which do not provide for statutory appraisal rights. These actions were not in and of themselves fraudulent, nor did the actions constitute a breach of a fiduciary duty. Rather, the key issue to be determined in this analysis is whether the plaintiffs have established any fraud, misrepresentation, or misconduct in Via Christi's involvement in the valuation of the limited partnership during the appraisal by its appraiser of choice, Paragon. In their brief on appeal, the plaintiffs argue that the appraisal was prepared by an appraiser selected by Via Christi at the direction of Via Christi and was not given to the plaintiffs for comment or criticism prior to the merger. However, according to the defendants, Paragon was chosen because of its expertise in the valuation of the transaction contemplated. The plaintiffs do not point to any specific evidence below to support a conclusion that Via Christi by its selection of Paragon for the appraisal engaged in any misconduct or manipulated the value of the limited partnership through manipulation of Paragon. The record supports the opposite conclusion. Although plaintiffs' appraisal valued the limited partnership nearly $5,000,000 more than the Paragon appraisal, Weinberger counsels that inquiry into the fairness of the price does not happen unless plaintiffs can establish fraud, misconduct, or misrepresentation. At the summary judgment hearing, the plaintiffs argued that Via Christi's involvement with the appraisal process in suggesting why different aspects of Paragon's assumptions were incorrect and needed to be changed demonstrated an interference in the appraisal process beyond providing data in an effort to achieve a friendly price for the incoming limited partners. However, when asked if the suggestions offered by Via Christi representatives were adopted by the appraiser without regard to the truth, plaintiffs' counsel responded: I'm not able to tell you whether the net impact was to increase or decrease the overall valuation. There were modifications in the figures in a way that I'm unable to express to the Court whether the impact was to increase, decrease or remain neutral with regard to the price being paid to the limited partnership interest holders. The aspect that we are critical of is the  is both the process in which the fiduciary clearly participated and comparing that to the other objective evidence regarding what a valuation would be. The defendants point out that discovery on the communications between Via Christi and the appraiser showed no evidence that Via Christi acted in anything other than an above-board manner, even going to the expense of retaining attorneys to convince Paragon not to reduce the value of the limited partnerships for minority and marketability discounts. Indeed, a review of the conclusions of Paragon's Confidential Valuation Letter Report provides: Based on the results for the methods that appear most applicable to the Partnership's current status and potential, primarily the Discounted Cash Flow method, Paragon believes that the Fair Market Value for a 100% equity interest in Partnership would be $6,700,000 assuming a 32.6% lack of marketability discount. However based upon VCHP's [Via Christi's] direction, and representations of its legal counsel's opinion, our analysis indicates, that a Fair Value for a 100% equity interest in the Partnership would be $9,900,000. Thus, while the evidence established Via Christi may have influenced the appraisal process in some manner, it is clear that this influence resulting in an increase of $3.2 million in the valuation of the limited partnership, which was in the best interest of the limited partners as well as the general partner. It is also important to recognize that the limited partner plaintiffs and the general partner, in the absence of discovery from Paragon, stipulated that Paragon would testify that its valuation was independent. Based upon this stipulation, the district court concluded that Paragon was in fact independent in its valuation of the limited partnership. The limited partner plaintiffs received the same value for their interests in the limited partnership as did the general partner, Via Christi. The limited partner plaintiffs have not established that Via Christi engaged in fraud, misrepresentation, or misconduct during the appraisal process sufficient to warrant a review of the fairness of the transaction under Weinberger.