June 3, 2021

Appraisal Statute Doesn’t Bar Extraordinary Dividend as Part of Merger

It’s not unprecedented for a seller to pay an extraordinary dividend as part of a merger, but there’s extraordinary and then there’s extraordinary! The situation confronting the Chancery Court in In Re GGP, Inc. Stockholder Litigation, (Del. Ch.; 5/21), definitely fell into the latter category.  That case involved a transaction where 98.5% of the deal consideration would be paid in the form of a pre-closing dividend of cash and shares, with the remaining consideration payable in cash at closing.

Vice Chancellor Slights observed that the claims and defenses asserted in this case tracked what’s become a familiar “rhythm” of post-closing Delaware merger litigation:

In hopes of securing more rigorous judicial scrutiny of fiduciary conduct, stockholders invoke the sounds of minority blockholders who act as if they are controlling stockholders, fiduciary decisionmakers who are overcome by allegiances to the controller, and stockholders who are coerced to sell their shares while starved of accurate and complete information.

In hopes of securing more judicial deference to fiduciary decision making, defendants invoke the sounds of passive minority blockholders and presumptively disinterested, independent (and often exculpated) fiduciaries who have faithfully served fully informed, uncoerced stockholders. When laid down on the same track, the sounds can be perceived as noise. But to the accustomed ear, there is rhythm.

While the Vice Chancellor may have been able to “name that tune” early on in the proceedings, the structure of the transaction lent itself to at least one novel claim. This excerpt from Steve Quinlivan’s recent blog on the decision summarizes that claim and the Court’s response to it:

Plaintiffs, stockholders of GGP, urged the Delaware Court of Chancery to conclude that the transaction’s two step structure—the payment of the pre-closing dividend followed by a post-closing payout—violated positive law. Specifically, plaintiffs argued that 8 Del. C. § 262 required Defendants to offer GGP stockholders appraisal for their shares at a pre-transaction value. By paying the pre-closing dividend separately, plaintiffs asserted defendants removed almost all value underlying the GGP shares available for appraisal.

According to the Court, neither party could identify case law addressing how a pre-closing dividend would (or should) be treated in an appraisal proceeding, but the Court believed the answer lies in the statute itself at Section 262(h).  That section directs the Court to value GGP “shares” as if GGP were a going concern “exclusive of any element of value arising from the accomplishment or expectation of the merger,” and then empowers the court to “take into account all relevant factors.”

The Court stated that language is designed to endow Delaware courts with flexibility, enabling the presiding judge to view the transaction as a whole in the course of determining GGP’s fair value at the time of the merger. The Court concluded the pre-closing dividend would, in its view, qualify as a “relevant factor” in the court’s assessment of the fair value of a GGP stockholder’s shares.

If you’re asking yourself – “haven’t I read something previously from Delaware about special dividends in connection with a merger?” – you’re right, you have.  In LAMPERS v.  Crawford, (Del. Ch.; 2/07), the Court determined that the seller’s stockholders had appraisal rights in a purported stock-for-stock merger because a special dividend declared in connection with transaction should be considered part of the merger consideration.

John Jenkins