Last week, in In re GGP Stockholder Litigation, (Del.; 7/22), a divided Delaware Supreme Court overruled the Chancery Court and refused to dismiss breach of fiduciary duty and aiding & abetting claims premised on allegedly misleading proxy disclosure concerning the appraisal rights available to stockholders who dissented from the transaction.
According to the plaintiffs, the target’s directors and the buyer structed the transaction to “eviscerate” stockholders’ appraisal rights. In order to accomplish this objective, the plaintiffs alleged that the parties bifurcated the consideration payable under the terms of the transaction. Over 95% of the total consideration was payable in the form of a pre-closing dividend, while the remainder was paid in the form of what the proxy statement defined as the “merger consideration.” Including the dividend, a total of $23.50 per share was paid in the transaction, of which only $0.312 per share was defined as “merger consideration.”
The target’s proxy statement disclosed that its stockholders were “entitled to exercise their appraisal rights solely in connection with the merger,” and that the target’s appraised fair value “may be greater than, the same as or less than” the “per share merger consideration.” The plaintiffs contended that this language linking appraisal rights to the defined term “merger consideration” was intended to mislead stockholders into concluding that their appraisal remedy would be limited to the target’s post-dividend value.
The Supreme Court first concluded that, as a matter of Delaware law, the pre-closing dividend was part of the merger consideration. The Court pointed to two reasons for this conclusion; first, the dividend was conditioned upon approval of the merger and, second, because it was paid for with the buyer’s funds in the same wire as the per share merger consideration. The Court then rejected the Chancery Court’s conclusion that the proxy statement’s disclosure about appraisal rights was not misleading:
The Proxy defined the “merger” as occurring after GGP’s charter was amended and the Pre-Closing Dividend was declared and told the GGP stockholders that they were “entitled to exercise their appraisal rights solely in connection with the merger.” The fair value available in that proceeding, stockholders were told, would be “greater than, the same as or less than” the “per share merger consideration.” This decision capitalizes Per-Share Merger Consideration for the reader’s convenience; the Proxy defined it in lowercase as the sliver of compensation, eventually set at $0.312, that would remain after GGP declared the massive Pre-Closing Dividend.
These disclosures were, in our view, confusing and misleading. As discussed above, a properly conducted appraisal would have valued GGP before the Charter Amendments and the payment of the Pre-Closing Dividend and the Per-Share Merger Consideration. It was the fair value of this pre-Transaction entity that stockholders were set to part with if they consented to the Transaction, and therefore it was this fair value that the stockholders were entitled to in an appraisal.
The Court ultimately refused to dismiss duty of loyalty-based disclosure claims against the target’s directors and aiding & abetting claims against the buyer and concluded that the stockholders had not waived their appraisal rights by accepting the non-volitional dividend payment.
Justices Montgomery-Reeves and Vaughn dissented from the Court’s decision. They indicated that they would have upheld the Chancery Court’s decision for three reasons:
(1) the Proxy’s use of the term “per-share merger consideration” in the appraisal notice tells the stockholders what is at risk in an appraisal proceeding; (2) the Proxy’s use of the term “merger” is qualified by the phrase “in connection with,” and the entirety of the Proxy makes clear that the Pre-Closing Dividend is connected to the merger; and (3) any appraisal proceeding would exclude any value (positive or negative) arising from the Transaction and the Pre-Closing Dividend is value arising from the Transaction.
– John Jenkins