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On Monday, in a post-trial memorandum opinion in Chertok v. OnSolve (Del. Ch.; 4/26), the Chancery Court found that a company impermissibly conditioned payment of merger consideration on the plaintiff stockholder executing ancillary documents that contained a release of claims. The merger agreement provided that the buyer “shall not pay any amounts” of the merger consideration to eligible stockholders “unless and until” they delivered stock certificates, an executed joinder, indemnification and release agreement, a letter of transmittal and Form W-9. The joinder, indemnification and release agreement was an annex to the merger agreement.

Plaintiff stockholder demanded appraisal, withdrew, declined to sign the joinder agreement and then, three years after closing, sent a letter asserting he was owed merger consideration and unpaid dividends. The company’s certificate of incorporation included the provisions of Section 262 of the DGCL. In Mehta v. Smurfit-Stone Container Corp. (Del. Ch.; 10/14), the Chancery Court read Section 262 as requiring stockholders who demand appraisal to receive merger consideration when no appraisal petition is timely filed and found that the defendant impermissibly conditioned the withdrawal of the stockholders’ appraisal demand (and payment of their merger consideration) on the stockholders signing a settlement agreement. So now, in OnSolve, the court concluded:

Under Section 262(e) of the DGCL, which is incorporated into the Certificate, OnSolve was obligated to pay the Merger consideration to Chertok after he timely withdrew the appraisal demand. But OnSolve insisted that a stockholder could not receive the Merger consideration unless the stockholder provided all of the Required Deliveries, including the Joinder Agreement. OnSolve earlier conceded, for purposes of the motion to dismiss, that Plaintiffs were justified in refusing to sign the Joinder Agreement as a condition to receive the Merger consideration, because “that release would lack consideration.” The court agreed and held that Plaintiffs had stated a claim for breach of contract by conditioning receipt of the Merger consideration on their returning an executed Joinder Agreement.

At trial, Defendant did not alter its position from the motion to dismiss stage. Rather, OnSolve conceded that it could not compel Chertok to execute the Joinder Agreement as a condition to payment of the Merger consideration. Accordingly, the court concludes that OnSolve’s conditioning payment of the Merger consideration upon Chertok’s returning an executed Joinder Agreement breached the Certificate.

I’m also going to point you to some footnotes now, and I’m not quite sure what to make of them.

– In footnote 84, defendant’s concession cited Cigna v. Audax Health (Del. Ch.; 11/14), in which the court held that the requirement to execute a release to receive consideration was unenforceable because it was not included in the merger agreement and not supported by separate consideration, and which somewhat changed the old approach of throwing releases and joinder language into letters of transmittal.

– And footnote 81, citing defendant’s brief, says “Solely for purposes of this motion, OnSolve allows that Plaintiffs could point to [Cigna] to justify their refusal to execute the Joinder Agreement, which contains a release.”

The court doesn’t otherwise touch Cigna in this decision. But note that the release was part of the joinder annexed to the merger agreement and included in the agreement as a condition of payment – very different than Cigna, where the release was not mentioned in the merger agreement at all. (And somewhat akin to the facts in Jhaveri v. K1 Investment Management LLC, (Del. Ch.; 6/25), which the Chancery Court distinguished from Cigna in footnote 86.) That said, the plaintiff’s appraisal demand was withdrawn post-closing, at which point, when the release was being sought, it’s hard to argue that it was a material inducement to the buyer closing the deal. Maybe I’m reading too much into these footnotes…

Plaintiff also argued that he was entitled to receive the merger consideration without any deductions for bonuses to management or incurred expenses, but the court didn’t buy that argument.

As Defendant indicated, if Plaintiffs’ contention were accepted, “no deal [would] ever happen because . . . anyone who is smart, [] would [] dissent, submit an appraisal and then withdraw it, . . . [to] get a better deal.” That is incompatible with the Merger deal structure and Delaware law.

The court determined the plaintiff was entitled to the merger consideration and dividends, plus prejudgment interest, but not to any other amounts beyond the merger consideration.

– Meredith Ervine