Delaware Corporate Law Update

Updates on Delaware Corporate Law by Evan O. Williford, Esq., Delaware Corporate Litigation Attorney.

Chancery Validates Opt-In Method To Avoid Appraisal Remedy

The Court published a decision yesterday, Krieger v. Wesco Financial Corp. (available here), involving a matter of first impression under the Delaware appraisal statute.  The Court held that a judicial appraisal may not be available to stockholders even when receiving cash as a default matter if the stockholders are given an election to receive stock if they wish.  The short (10-page) decision bears reading by those who draft proxy statements and those who represent stockholders considering whether to assert appraisal rights.

Wesco underwent a merger with its parent Berkshire Hathaway, Inc. and a Berkshire subsidiary.  Under Delaware’s appraisal statute, Section 262, appraisal rights may be available in such mergers even when (as here) Wesco’s shares were listed on a national securities exchange.  Under Section 262 such rights are available if (to simplify a bit) the shareholders are “required” by the terms of the merger agreement to receive anything other than shares of stock in the surviving entity or a nationally traded company.  Wesco shareholders received cash as a default, but could elect to receive shares  in another Berkshire entity.

The Court ruled that under the language of 262 the shareholders were not “required” to accept cash and therefore an appraisal remedy was not available.  In doing so it rejected the argument that appraisal rights were available, on a stockholder-by-stockholder basis, to those stockholders who did not elect.

Wesco had informed stockholders that it believed appraisal rights were not available but that there were no authorities one way or the other.  The Court noted that this had been an accurate statement.

The Wesco proxy statement also stated that Wesco reserved the right to “take the position that appraisal . . . may not be exercised with respect to any shares as to which cash was elected or stock was received.”  The Court noted that such a position would have been incorrect as the appraisal statute does not depend on an individual stockholder’s election; and that a quasi-appraisal remedy could be available if such a disclosure was material.  The Court, however, held the statement to be immaterial here because appraisal was not available in any event.

Two points of interest here.  First, the Court did not make a distinction between Wesco stating that it might take such a position later as opposed to purporting to state the law. Thus, if a disclosure is otherwise innacurate, phrasing it as a potential position may not help avoid a quasi-appraisal remedy.

Second, the Court did not discuss any argument that the disclosure might have discouraged stockholders from electing to receive stock if they concluded (i) from the disclosures of the absence of specific decisional law on point that an appraisal remedy might be available and (ii) that not making an the election to receive stock (consideration the availability of which makes the appraisal remedy unavailable) gave them a better chance of receiving an appraisal.  The Court either did not hear this argument or, if it did, was not swayed by it.

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Filed under: Appraisal, Court of Chancery

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Delaware Corporate Law Update solely reflect the views of Evan Williford of The Williford Firm, LLP. Its purpose is to provide general information concerning Delaware law; no representation is made about the accuracy of any information contained herein, and it may or may not be updated to reflect subsequent relevant events. This website is not intended to provide legal advice. It does not form any attorney-client relationship and it is not a substitute for one.