In In re United Capital Corp., Stockholders Litigation, C.A. No. 11619-VCMR (Del. Ch. Jan. 4, 2017), the Delaware Court of Chancery dismissed a suit brought by plaintiff minority stockholders (“Plaintiff”) that sought a quasi-appraisal to remedy alleged breaches of the duty of disclosure in connection with the acquisition of United Capital Corp. (“United Capital” or “Company”) via short-form merger. The Court concluded that Plaintiff had not adequately alleged that any omitted information was material to the decision to seek appraisal and that the duty of disclosure was not violated.
In June 2015, A. F. Petrocelli, the Company’s Chairman, President, CEO, and a 94% stockholder of the Company, submitted an initial bid letter to the Company’s board of directors (the “Board”), offering to purchase the minority shares of the Company for $30 per share. A special committee was formed to evaluate and negotiate, including the power to reject, the proposed transaction (the “Special Committee”). On August 5, the Special Committee met and decided not to retain advisors, other than legal counsel, to assist in its evaluation of the proposal. After reviewing financial and other information provided by the Company, the Special Committee concluded that the initial $30 per share bid was insufficient and countered at $35 per share. Ultimately the Special Committee agreed to a $32 per share final offer and approved the proposed merger.
Petrocelli then structured his ownership interest in a merger entity, enabling the planned transaction to utilize Delaware’s short-form merger statute. The written notice of the merger stockholders received from the Company in early September 2015 (the “Notice”) totaled eighty pages and included, among other things, financial statements for 2013, 2014, and 2015, management’s analysis of the Company’s financial status, the background of the merger, and potential Board and Special Committee conflicts. The merger was effective on September 30, with United Capital as the surviving entity and Petrocelli as the sole stockholder.
Following the merger, in October 2015, two complaints were filed, which were ultimately consolidated in February 2016. Plaintiff claimed the minority stockholders were entitled to a quasi-appraisal, a rare remedy in the Chancery Court that can be triggered if stockholders are not provided enough information in order to decide whether to accept the merger consideration or seek a full appraisal. While a parent corporation is not required to establish entire fairness in a short-form merger, the duty of full disclosure remains, which requires the company to notify the minority of the availability of appraisal rights, include a correct copy of the appraisal statute, and disclose information that is material to the decision of whether or not to seek appraisal.
Plaintiff identified numerous omitted facts he deemed material in alleged violation of the Company’s duty of disclosure. “Specifically, he points to the exclusion of (1) the information used by the Special Committee to set the $32 per share merger price, (2) Petrocelli’s rationale for his original offer, (3) specific financial information, including projections, (4) the extent to which cash and cash equivalents were working capital, (5) potential conflicts of two of the three purportedly independent members of the Special Committee, and (6) the identities of certain directors and a director’s spouse who jointly owned an $8 million note with the Company.”
The court highlighted the fact that the Plaintiff relied primarily on the Notice, including financial disclosures therein, to make his determination that the merger consideration was inadequate. Plaintiff’s allegations, the court explained, “suggest that the Notice’s financial disclosures give Plaintiff the minimum information necessary to determine whether he could ‘trust that the price offered is good enough,’ or whether the price undervalued the Company ‘so significantly that appraisal is a worthwhile endeavor.’” Overall, the court determined that each of the facts Plaintiff claimed were improperly omitted was either immaterial for deciding whether or not to seek appraisal, or that the Company had provided sufficient information in the Notice to make that decision.
First, in relation to the Special Committee’s determination that $32 per share was a fair price, the court found that the disclosures in the Notice were sufficient. Specifically, the Notice disclosed comprehensive information regarding the Special Committee (including its analysis regarding advisors, review of the Company’s financial information and assessment of benefits to minority stockholders), the negotiating process, and the Board’s consideration of numerous factors in determining that the merger price was fair. The Notice also included robust financial statements that would allow stockholders to decide whether or not to seek appraisal.
Second, the court rejected Plaintiff’s argument that the Notice failed to give Petrocelli’s rationale for how he set the merger price, finding that the Notice adequately disclosed the reasoning behind the $30 per share offer. Given the extensive disclosure included in the Notice regarding the entire negotiation process and the Company’s business and finances, the court was not convinced that including more specific information regarding how Petrocelli came up with his initial offer price would significantly alter the total mix of information available under the circumstances.
The court similarly rejected Plaintiff’s third argument that the Notice failed to disclose any financial projections, and that the Notice was materially deficient because any purportedly forward-looking information did not provide an accurate view of the Company’s future. Plaintiff claimed that the Chancery Court’s decision in Erickson v. Centennial Beauregard Cellular, LLC, stood for the proposition that in the short-form merger context, financial projections are material. The court quickly distinguished Erickson, noting that the Company disclosed current and historical information, and forward-looking information regarding revenues and future obligations, and that the Plaintiff failed to allege how any projections would be material given the breadth of the financial data that was disclosed in the Notice.
The court rejected Plaintiff’s fourth claim that the Company failed to disclose the extent to which the Company’s cash was working capital or the Company’s plans for utilizing the cash in its business plans. The court found the Notice “does disclose the extent to which cash is working capital, cash utilization … and forward-looking information.” The Plaintiff failed to explain why any additional information would alter the total mix of information available, instead suggesting such information would have been helpful in independently valuing the Company. Noting that “an absent fact’s mere helpfulness does not make that fact material” and “in a short-form merger, the minority stockholders are not entitled to all facts material to their own valuation assessment,” the court concluded that sufficient information was provided and that any omitted facts were not material to determining whether or not to seek appraisal.
Plaintiff’s fifth claim challenged the independence of two of the three directors that comprised the Special Committee. The Notice, said the court, “reveal[ed] the Special Committee’s existence, outline[d] its negotiation process, disclose[d] [the two directors’] potential conflicts, provide[d] financial and business information necessary to inform stockholders about whether to seek appraisal, and [did] not deceive stockholders into relying primarily on the Special Committee.” Furthermore, the Plaintiff conceded that there was enough public information to suggest the merger price was inadequate, which Plaintiff used to determine he could not trust the price, which supports the finding that stockholders had all the information necessary to decide whether to seek appraisal.
The Plaintiff’s sixth claim alleged that the failure to disclose the identity of the directors and director’s wife who participated in a related party transaction with the Company was a material omission. The court concluded that there was nothing to suggest that the transaction involved any member of the Special Committee, considering the Notice included a robust disclosure of potential conflicts for the members of the Special Committee.
The court, unpersuaded that the Company had violated its duty of disclosure—either because the Notice sufficiently disclosed information for minority stockholders to decide whether to seek appraisal or because the alleged omitted facts were immaterial to that decision—dismissed Plaintiff’s action and concluded the sole remedy in challenging the short-form merger was appraisal.