457 A.2d 701
PROCEDURAL POSTURE: Plaintiff appealed from decision of the Court of Chancery of the State of Delaware in and for New Castle County awarding judgment in favor of defendants in action brought by plaintiff that challenged the elimination of defendant's minority shareholders by cash-out merger between defendant and its majority owner.
-Action was brought by plaintiff class challenging the elimination of defendant corporation's minority shareholders by a cash-out merger between defendant corporation and its majority owner.
-The lower court held that the terms of the merger were fair to plaintiff and the other minority shareholders of defendant corporation.
On appeal, the court held that the record did not establish that the transaction satisfied any reasonable concept of fair dealing, as the matter of disclosure to the defendant's directors was wholly flawed by conflicts of interest raised in feasibility study, and the minority shareholders were denied critical information; thus, the vote of the minority shareholders was not an informed one.
-The court further held that the standard "Delaware block" or weighted average method of valuation, should not control. Rather, the court endorsed a more liberal approach requiring consideration of all relevant factors pursuant to Del. Code Ann. tit. 8, § 262(h).
-The Court held that in short-form freeze-out mergers, defendants have the burden of satisfying the Entire Fairness Test. This test has two prongs: fair dealing and fair price.
- Fair dealing concerns the procedures of the deal: how and when it was initiated, where it was negotiated, and how it was approved. The duty of loyalty, as manifested by a showing of good faith and candor, is inherent to fair dealing. When directors or controlling shareholders are on both sides of the transaction, it is difficult to show that the transaction is indeed one at arms-length. Directors can try to meet their burden by setting up an independent negotiating committee of outside directors.
- Fair price concerns the terms of the deal. To determine whether there was a fair price, all relevant factors that may affect a company's stock value are considered.
OUTCOME: The court reversed the judgment and remanded the matter for further proceedings.
Interested in learning how to get the top grades in your law school classes? Want to learn how to study smarter than your competition? Interested in transferring to a high ranked school?