April 10, 2018

Appraisal: Resurrecting the “De Facto Merger”?

Steve Hecht & Rich Bodnar recently blogged about an interesting challenge to the pending transaction between Dr. Pepper & Keurig. The plaintiffs’ complaint raises the issue of whether a shareholder has any recourse if a company structures a deal for the purpose of avoiding appraisal rights.  This excerpt lays out the plaintiff’s beef with the deal:

According to the complaint, the ‘merger’ at issue has been structured as an amendment to Dr. Pepper’s charter, which would multiply the number of Dr. Pepper shares by seven. The shares would be issued to Keurig shareholders, the result being that post-merger/not-merger, Keurig shareholders would own about 87% of Dr. Pepper – a de facto merger, according to the complaint.

In economic effect, Keurig will purchase ‘new’ Dr. Pepper shares (as a result of the total share count being multiplied by seven) and thereby receive a supermajority of total company shares, rather than purchasing 87% of Dr. Pepper on the market or via a tender offer.

How are appraisal rights involved?  The consideration for the share issuance takes the form of a onetime cash dividend for $103.75 per share to pre-amendment shareholders.  Normally, if this were a classic merger, such a deal would be subject to appraisal rights under DGCL §262 – a cash merger has appraisal rights attached.  But the unique Dr. Pepper structure would not provide for appraisal rights – because the stockholders are just approving an amendment, so the theory goes, they are not actually engaged in a merger.

This isn’t the first time that the Delaware courts have been down this path. In Heilbrunn v. Sun Chemical, 150 A.2d 755 (Del. 1959) and again in Hariton v. Arco Electronics, 188 A2d 123 (Del. 1963), the Delaware Supreme Court refused to re-characterize deals structured as asset sales as “de facto mergers” – despite the fact that both transactions had the same substantive result as a merger.

Like the plaintiffs in this case, the plaintiffs in those earlier cases hoped that by re-characterizing the transactions as de facto mergers, they would be able to exercise the statutory appraisal rights that were unavailable in an asset purchase.

In rejecting the plaintiffs’ arguments, the Hariton Court said that “the sale-of-assets statute and the merger statute are independent of each other. They are, so to speak, of equal dignity, and the framers of a reorganization plan may resort to either type of corporate mechanics to achieve the desired end.”

That “independence legal significance” doctrine seemed pretty impregnable until 2007, when the Chancery Court decided LAMPERS v. Crawford, (Del. Ch.; 2/07). In that case, which arose out of the contested takeover of Caremark, the court treated a special cash dividend and a stock for stock merger as an integrated transaction and concluded that the Caremark shareholders were entitled to appraisal rights.

There hasn’t been much action on the de facto merger front since the Crawford case, so this will be an interesting one to watch.

John Jenkins