MOORE, JUSTICE.
This post-trial appeal was reheard en banc from a decision
of the Court of Chancery. It was brought by the class
action plaintiff below, a former shareholder of UOP,
Inc., who challenged the elimination of UOP's minority
shareholders by a cash-out merger between UOP and its
majority owner, The Signal Companies, Inc. Originally,
the defendants in this action were Signal, UOP, certain
officers and directors of those companies, and UOP's
investment banker, Lehman Brothers Kuhn Loeb, Inc. The
present Chancellor held that the terms of the merger
were fair to the plaintiff and the other minority shareholders
of UOP. Accordingly, he entered judgment in favor of
the defendants.
Numerous points were raised by the parties, but we
address only the following questions presented by the
trial court's opinion:
1) The plaintiff's duty to plead sufficient facts
demonstrating the unfairness of the challenged merger;
2) The burden of proof upon the parties where the
merger has been approved by the purportedly informed
vote of a majority of the minority shareholders;
3) The fairness of the merger in terms of adequacy
of the defendants' disclosures to the minority shareholders;
4) The fairness of the merger in terms of adequacy
of the price paid for the minority shares and the
remedy appropriate to that issue; and
5) The continued force and effect of Singer v. Magnavox
Co., Del.Supr., 380 A.2d 969, 980 (1977), and its
progeny.
In ruling for the defendants, the Chancellor re-stated
his earlier conclusion that the plaintiff in a suit
challenging a cash-out merger must allege specific acts
of fraud, misrepresentation or other items of misconduct
to demonstrate the unfairness of the merger terms to
the minority. We approve this rule and affirm it.
The Chancellor also held that even though the ultimate
burden of proof is on the majority shareholder to show
by a preponderance of the evidence that the transaction
is fair, it is first the burden of the plaintiff attacking
the merger to demonstrate some basis for invoking the
fairness obligation. We agree with that principle. However,
where corporate action has been approved by an informed
vote of a majority of the minority shareholders, we
conclude that the burden entirely shifts to the plaintiff
to show that the transaction was unfair to the minority.
But in all this, the burden clearly remains on those
relying on the vote to show that they completely disclosed
all material facts relevant to the transaction.
Here, the record does not support a conclusion that
the minority stockholder vote was an informed one. Material
information, necessary to acquaint those shareholders
with the bargaining positions of Signal and UOP, was
withheld under circumstances amounting to a breach of
fiduciary duty. We therefore conclude that this merger
does not meet the test of fairness, at least as we address
that concept, and no burden thus shifted to the plaintiff
by reason of the minority shareholder vote. Accordingly,
we reverse and remand for further proceedings consistent
herewith.
In considering the nature of the remedy available under
our law to minority shareholders in a cash-out merger,
we believe that it is, and hereafter should be, an appraisal
under 8 Del.C. § 262 as hereinafter construed.
We therefore overrule Lynch v. Vickers Energy Corp.,
Del.Supr., 429 A.2d 497 (1981) (Lynch II) to the extent
that it purports to limit a stockholder's monetary relief
to a specific damage formula. But to give full effect
to section 262 within the framework of the General Corporation
Law we adopt a more liberal, less rigid and stylized,
approach to the valuation process than has heretofore
been permitted by our courts. While the present state
of these proceedings does not admit the plaintiff to
the appraisal remedy per se, the practical effect of
the remedy we do grant him will be co-extensive with
the liberalized valuation and appraisal methods we herein
approve for cases coming after this decision.
Our treatment of these matters has necessarily led
us to a reconsideration of the business purpose rule
announced in the trilogy of Singer v. Magnavox Co.,
supra; Tanzer v. International General Industries, Inc.,
Del.Supr., 379 A.2d 1121 (1977); and Roland International
Corp. v. Najjar, Del.Supr., 407 A.2d 1032 (1979). For
the reasons hereafter set forth we consider that the
business purpose requirement of these cases is no longer
the law of Delaware.
I.
The facts found by the trial court, pertinent to the
issues before us, are supported by the record, and we
draw from them as set out in the Chancellor's opinion.
Signal is a diversified, technically based company
operating through various subsidiaries. Its stock is
publicly traded on the New York, Philadelphia and Pacific
Stock Exchanges. UOP, formerly known as Universal Oil
Products Company, was a diversified industrial company
engaged in various lines of business, including petroleum
and petro-chemical services and related products, construction,
fabricated metal products, transportation equipment
products, chemicals and plastics, and other products
and services including land development, lumber products
and waste disposal. Its stock was publicly held and
listed on the New York Stock Exchange.
In 1974 Signal sold one of its wholly-owned subsidiaries
for $420,000,000 in cash. See Gimbel v. Signal Companies,
Inc., Del.Ch., 316 A.2d 599, aff'd, Del.Supr., 316 A.2d
619 (1974). While looking to invest this cash surplus,
Signal became interested in UOP as a possible acquisition.
Friendly negotiations ensued, and Signal proposed to
acquire a controlling interest in UOP at a price of
$19 per share. UOP's representatives sought $25 per
share. In the arm's length bargaining that followed,
an understanding was reached whereby Signal agreed to
purchase from UOP 1,500,000 shares of UOP's authorized
but unissued stock at $21 per share.
This purchase was contingent upon Signal making a successful
cash tender offer for 4,300,000 publicly held shares
of UOP, also at a price of $21 per share. This combined
method of acquisition permitted Signal to acquire 5,800,000
shares of stock, representing 50.5% of UOP's outstanding
shares. The UOP board of directors advised the company's
shareholders that it had no objection to Signal's tender
offer at that price. Immediately before the announcement
of the tender offer, UOP's common stock had been trading
on the New York Stock Exchange at a fraction under $14
per share.
The negotiations between Signal and UOP occurred during
April 1975, and the resulting tender offer was greatly
oversubscribed. However, Signal limited its total purchase
of the tendered shares so that, when coupled with the
stock bought from UOP, it had achieved its goal of becoming
a 50.5% shareholder of UOP.
Although UOP's board consisted of thirteen directors,
Signal nominated and elected only six. Of these, five
were either directors or employees of Signal. The sixth,
a partner in the banking firm of Lazard Freres &
Co., had been one of Signal's representatives in the
negotiations and bargaining with UOP concerning the
tender offer and purchase price of the UOP shares.
However, the president and chief executive officer
of UOP retired during 1975, and Signal caused him to
be replaced by James V. Crawford, a long-time employee
and senior executive vice president of one of Signal's
wholly-owned subsidiaries. Crawford succeeded his predecessor
on UOP's board of directors and also was made a director
of Signal.
By the end of 1977 Signal basically was unsuccessful
in finding other suitable investment candidates for
its excess cash, and by February 1978 considered that
it had no other realistic acquisitions available to
it on a friendly basis. Once again its attention turned
to UOP.
The trial court found that at the instigation of certain
Signal management personnel, including William W. Walkup,
its board chairman, and Forrest N. Shumway, its president,
a feasibility study was made concerning the possible
acquisition of the balance of UOP's outstanding shares.
This study was performed by two Signal officers, Charles
S. Arledge, vice president (director of planning), and
Andrew J. Chitiea, senior vice president (chief financial
officer). Messrs. Walkup, Shumway, Arledge and Chitiea
were all directors of UOP in addition to their membership
on the Signal board.
Arledge and Chitiea concluded that it would be a good
investment for Signal to acquire the remaining 49.5%
of UOP shares at any price up to $24 each. Their report
was discussed between Walkup and Shumway who, along
with Arledge, Chitiea and Brewster L. Arms, internal
counsel for Signal, constituted Signal's senior management.
In particular, they talked about the proper price to
be paid if the acquisition was pursued, purportedly
keeping in mind that as UOP's majority shareholder,
Signal owed a fiduciary responsibility to both its own
stockholders as well as to UOP's minority. It was ultimately
agreed that a meeting of Signal's Executive Committee
would be called to propose that Signal acquire the remaining
outstanding stock of UOP through a cash-out merger in
the range of $20 to $21 per share.
The Executive Committee meeting was set for February
28, 1978. As a courtesy, UOP's president, Crawford,
was invited to attend, although he was not a member
of Signal's executive committee. On his arrival, and
prior to the meeting, Crawford was asked to meet privately
with Walkup and Shumway. He was then told of Signal's
plan to acquire full ownership of UOP and was asked
for his reaction to the proposed price range of $20
to $21 per share. Crawford said he thought such a price
would be "generous", and that it was certainly
one which should be submitted to UOP's minority shareholders
for their ultimate consideration. * * *
Thus, Crawford voiced no objection to the $20 to $21
price range, nor did he suggest that Signal should consider
paying more than $21 per share for the minority interests.
Later, at the Executive Committee meeting the same factors
were discussed, with Crawford repeating the position
he earlier took with Walkup and Shumway. Also considered
was the 1975 tender offer and the fact that it had been
greatly oversubscribed at $21 per share. For many reasons,
Signal's management concluded that the acquisition of
UOP's minority shares provided the solution to a number
of its business problems.
Thus, it was the consensus that a price of $20 to $21
per share would be fair to both Signal and the minority
shareholders of UOP. Signal's executive committee authorized
its management "to negotiate" with UOP "for
a cash acquisition of the minority ownership in UOP,
Inc., with the intention of presenting a proposal to
[Signal's] board of directors * * * on March 6, 1978".
Immediately after this February 28, 1978 meeting, Signal
issued a press release stating:
The Signal Companies, Inc. and UOP, Inc. are conducting
negotiations for the acquisition for cash by Signal
of the 49.5 per cent of UOP which it does not presently
own, announced Forrest N. Shumway, president and chief
executive officer of Signal, and James V. Crawford,
UOP president.
Price and other terms of the proposed transaction have
not yet been finalized and would be subject to approval
of the boards of directors of Signal and UOP, scheduled
to meet early next week, the stockholders of UOP and
certain federal agencies.
The announcement also referred to the fact that the
closing price of UOP's common stock on that day was
$14.50 per share.
Two days later, on March 2, 1978, Signal issued a second
press release stating that its management would recommend
a price in the range of $20 to $21 per share for UOP's
49.5% minority interest. This announcement referred
to Signal's earlier statement that "negotiations"
were being conducted for the acquisition of the minority
shares.
Between Tuesday, February 28, 1978 and Monday, March
6, 1978, a total of four business days, Crawford spoke
by telephone with all of UOP's non-Signal, i.e., outside,
directors. Also during that period, Crawford retained
Lehman Brothers to render a fairness opinion as to the
price offered the minority for its stock. He gave two
reasons for this choice. First, the time schedule between
the announcement and the board meetings was short (by
then only three business days) and since Lehman Brothers
had been acting as UOP's investment banker for many
years, Crawford felt that it would be in the best position
to respond on such brief notice. Second, James W. Glanville,
a long-time director of UOP and a partner in Lehman
Brothers, had acted as a financial advisor to UOP for
many years. Crawford believed that Glanville's familiarity
with UOP, as a member of its board, would also be of
assistance in enabling Lehman Brothers to render a fairness
opinion within the existing time constraints.
Crawford telephoned Glanville, who gave his assurance
that Lehman Brothers had no conflicts that would prevent
it from accepting the task. Glanville's immediate personal
reaction was that a price of $20 to $21 would certainly
be fair, since it represented almost a 50% premium over
UOP's market price. Glanville sought a $250,000 fee
for Lehman Brothers' services, but Crawford thought
this too much. After further discussions Glanville finally
agreed that Lehman Brothers would render its fairness
opinion for $150,000.
During this period Crawford also had several telephone
contacts with Signal officials. In only one of them,
however, was the price of the shares discussed. In a
conversation with Walkup, Crawford advised that as a
result of his communications with UOP's non-Signal directors,
it was his feeling that the price would have to be the
top of the proposed range, or $21 per share, if the
approval of UOP's outside directors was to be obtained.
But again, he did not seek any price higher than $21.
Glanville assembled a three-man Lehman Brothers team
to do the work on the fairness opinion. These persons
examined relevant documents and information concerning
UOP, including its annual reports and its Securities
and Exchange Commission filings from 1973 through 1976,
as well as its audited financial statements for 1977,
its interim reports to shareholders, and its recent
and historical market prices and trading volumes. In
addition, on Friday, March 3, 1978, two members of the
Lehman Brothers team flew to UOP's headquarters in Des
Plaines, Illinois, to perform a "due diligence"
visit, during the course of which they interviewed Crawford
as well as UOP's general counsel, its chief financial
officer, and other key executives and personnel.
As a result, the Lehman Brothers team concluded that
"the price of either $20 or $21 would be a fair
price for the remaining shares of UOP". They telephoned
this impression to Glanville, who was spending the weekend
in Vermont.
On Monday morning, March 6, 1978, Glanville and the
senior member of the Lehman Brothers team flew to Des
Plaines to attend the scheduled UOP directors meeting.
Glanville looked over the assembled information during
the flight. The two had with them the draft of a "fairness
opinion letter" in which the price had been left
blank. Either during or immediately prior to the directors'
meeting, the two-page "fairness opinion letter"
was typed in final form and the price of $21 per share
was inserted.
On March 6, 1978, both the Signal and UOP boards were
convened to consider the proposed merger. Telephone
communications were maintained between the two meetings.
Walkup, Signal's board chairman, and also a UOP director,
attended UOP's meeting with Crawford in order to present
Signal's position and answer any questions that UOP's
non-Signal directors might have. Arledge and Chitiea,
along with Signal's other designees on UOP's board,
participated by conference telephone. All of UOP's outside
directors attended the meeting either in person or by
conference telephone.
First, Signal's board unanimously adopted a resolution
authorizing Signal to propose to UOP a cash merger of
$21 per share as outlined in a certain merger agreement,
and other supporting documents. This proposal required
that the merger be approved by a majority of UOP's outstanding
minority shares voting at the stockholders meeting at
which the merger would be considered, and that the minority
shares voting in favor of the merger, when coupled with
Signal's 50.5% interest would have to comprise at least
two-thirds of all UOP shares. Otherwise the proposed
merger would be deemed disapproved.
UOP's board then considered the proposal. Copies of
the agreement were delivered to the directors in attendance,
and other copies had been forwarded earlier to the directors
participating by telephone. They also had before them
UOP financial data for 1974–1977, UOP's most recent
financial statements, market price information, and
budget projections for 1978. In addition they had Lehman
Brothers' hurriedly prepared fairness opinion letter
finding the price of $21 to be fair. Glanville, the
Lehman Brothers partner, and UOP director, commented
on the information that had gone into preparation of
the letter.
Signal also suggests that the Arledge—Chitiea
feasibility study, indicating that a price of up to
$24 per share would be a "good investment"
for Signal, was discussed at the UOP directors' meeting.
The Chancellor made no such finding, and our independent
review of the record, detailed infra, satisfies us by
a preponderance of the evidence that there was no discussion
of this document at UOP's board meeting. Furthermore,
it is clear beyond peradventure that nothing in that
report was ever disclosed to UOP's minority shareholders
prior to their approval of the merger.
After consideration of Signal's proposal, Walkup and
Crawford left the meeting to permit a free and uninhibited
exchange between UOP's non-Signal directors. Upon their
return a resolution to accept Signal's offer was then
proposed and adopted. While Signal's men on UOP's board
participated in various aspects of the meeting, they
abstained from voting. However, the minutes show that
each of them "if voting would have voted yes".
On March 7, 1978, UOP sent a letter to its shareholders
advising them of the action taken by UOP's board with
respect to Signal's offer. This document pointed out,
among other things, that on February 28, 1978 "both
companies had announced negotiations were being conducted".
Despite the swift board action of the two companies,
the merger was not submitted to UOP's shareholders until
their annual meeting on May 26, 1978. In the notice
of that meeting and proxy statement sent to shareholders
in May, UOP's management and board urged that the merger
be approved. The proxy statement also advised:
The price was determined after discussions between
James V. Crawford, a director of Signal and Chief
Executive Officer of UOP, and officers of Signal which
took place during meetings on February 28, 1978, and
in the course of several subsequent telephone conversations.
(Emphasis added.)
In the original draft of the proxy statement the word
"negotiations" had been used rather than "discussions".
However, when the Securities and Exchange Commission
sought details of the "negotiations" as part
of its review of these materials, the term was deleted
and the word "discussions" was substituted.
The proxy statement indicated that the vote of UOP's
board in approving the merger had been unanimous. It
also advised the shareholders that Lehman Brothers had
given its opinion that the merger price of $21 per share
was fair to UOP's minority. However, it did not disclose
the hurried method by which this conclusion was reached.
As of the record date of UOP's annual meeting, there
were 11,488,302 shares of UOP common stock outstanding,
5,688,302 of which were owned by the minority. At the
meeting only 56%, or 3,208,652, of the minority shares
were voted. Of these, 2,953,812, or 51.9% of the total
minority, voted for the merger, and 254,840 voted against
it. When Signal's stock was added to the minority shares
voting in favor, a total of 76.2% of UOP's outstanding
shares approved the merger while only 2.2% opposed it.
By its terms the merger became effective on May 26,
1978, and each share of UOP's stock held by the minority
was automatically converted into a right to receive
$21 cash.
II.
A.
A primary issue mandating reversal is the preparation
by two UOP directors, Arledge and Chitiea, of their
feasibility study for the exclusive use and benefit
of Signal. This document was of obvious significance
to both Signal and UOP. Using UOP data, it described
the advantages to Signal of ousting the minority at
a price range of $21–$24 per share. Mr. Arledge,
one of the authors, outlined the benefits to Signal:
Purpose of the Merger
1) Provides an outstanding investment opportunity
for Signal—(Better than any recent acquisition
we have seen.)
2) Increases Signal's earnings.
3) Facilitates the flow of resources between Signal
and its subsidiaries—(Big factor—works
both ways.)
4) Provides cost savings potential for Signal and
UOP.
5) Improves the percentage of Signal's "operating
earnings" as opposed to "holding company
earnings."
6) Simplifies the understanding of Signal.
7) Facilitates technological exchange among Signal's
subsidiaries.
8) Eliminates potential conflicts of interest.
Having written those words, solely for the use of Signal
it is clear from the record that neither Arledge nor
Chitiea shared this report with their fellow directors
of UOP. We are satisfied that no one else did either.
This conduct hardly meets the fiduciary standards applicable
to such a transaction * * *
The Arledge—Chitiea report speaks for itself
in supporting the Chancellor's finding that a price
of up to $24 was a "good investment" for Signal.
It shows that a return on the investment at $21 would
be 15.7% versus 15.5% at $24 per share. This was a difference
of only two-tenths of one percent, while it meant over
$17,000,000 to the minority. Under such circumstances,
paying UOP's minority shareholders $24 would have had
relatively little long-term effect on Signal, and the
Chancellor's findings concerning the benefit to Signal,
even at a price of $24, were obviously correct.
Certainly, this was a matter of material significance
to UOP and its shareholders. Since the study was prepared
by two UOP directors, using UOP information for the
exclusive benefit of Signal, and nothing whatever was
done to disclose it to the outside UOP directors or
the minority shareholders, a question of breach of fiduciary
duty arises. This problem occurs because there were
common Signal—UOP directors participating, at
least to some extent, in the UOP board's decision-making
processes without full disclosure of the conflicts they
faced. FN 7
FN 7 Although perfection is not possible, or expected,
the result here could have been entirely different
if UOP had appointed an independent negotiating committee
of its outside directors to deal with Signal at arm's
length. See, e.g., Harriman v. E.I. du Pont De Nemours
& Co., 411 F.Supp. 133 (D.Del.1975). Since fairness
in this context can be equated to conduct by a theoretical,
wholly independent, board of directors acting upon
the matter before them, it is unfortunate that this
course apparently was neither considered nor pursued.
Johnston v. Greene, Del.Supr., 121 A.2d 919, 925 (1956).
Particularly in a parent-subsidiary context, a showing
that the action taken was as though each of the contending
parties had in fact exerted its bargaining power against
the other at arm's length is strong evidence that
the transaction meets the test of fairness. Getty
Oil Co. v. Skelly Oil Co., Del.Supr., 267 A.2d 883,
886 (1970); Puma v. Marriott, Del.Ch., 283 A.2d 693,
696 (1971).
B.
In assessing this situation, the Court of Chancery
was required to examine what information defendants
had and to measure it against what they gave to the
minority stockholders, in a context in which "complete
candor" is required. In other words, the limited
function of the Court was to determine whether defendants
had disclosed all information in their possession germane
to the transaction in issue. And by "germane"
we mean, for present purposes, information such as a
reasonable shareholder would consider important in deciding
whether to sell or retain stock.
* * *
* * * Completeness, not adequacy, is both the norm
and the mandate under present circumstances.
Lynch v. Vickers Energy Corp., Del.Supr., 383 A.2d
278, 281 (1977) (Lynch I). This is merely stating in
another way the long-existing principle of Delaware
law that these Signal designated directors on UOP's
board still owed UOP and its shareholders an uncompromising
duty of loyalty. * * *
Given the absence of any attempt to structure this
transaction on an arm's length basis, Signal cannot
escape the effects of the conflicts it faced, particularly
when its designees on UOP's board did not totally abstain
from participation in the matter. There is no "safe
harbor" for such divided loyalties in Delaware.
When directors of a Delaware corporation are on both
sides of a transaction, they are required to demonstrate
their utmost good faith and the most scrupulous inherent
fairness of the bargain. Gottlieb v. Heyden Chemical
Corp., Del.Supr., 91 A.2d 57, 57–58 (1952). The
requirement of fairness is unflinching in its demand
that where one stands on both sides of a transaction,
he has the burden of establishing its entire fairness,
sufficient to pass the test of careful scrutiny by the
courts.
There is no dilution of this obligation where one holds
dual or multiple directorships, as in a parent-subsidiary
context. Levien v. Sinclair Oil Corp., Del.Ch., 261
A.2d 911, 915 (1969). Thus, individuals who act in a
dual capacity as directors of two corporations, one
of whom is parent and the other subsidiary, owe the
same duty of good management to both corporations, and
in the absence of an independent negotiating structure
(see note 7, supra), or the directors' total abstention
from any participation in the matter, this duty is to
be exercised in light of what is best for both companies.
The record demonstrates that Signal has not met this
obligation.
C.
The concept of fairness has two basic aspects: fair
dealing and fair price. The former embraces questions
of when the transaction was timed, how it was initiated,
structured, negotiated, disclosed to the directors,
and how the approvals of the directors and the stockholders
were obtained. The latter aspect of fairness relates
to the economic and financial considerations of the
proposed merger, including all relevant factors: assets,
market value, earnings, future prospects, and any other
elements that affect the intrinsic or inherent value
of a company's stock. However, the test for fairness
is not a bifurcated one as between fair dealing and
price. All aspects of the issue must be examined as
a whole since the question is one of entire fairness.
However, in a non-fraudulent transaction we recognize
that price may be the preponderant consideration outweighing
other features of the merger. Here, we address the two
basic aspects of fairness separately because we find
reversible error as to both.
D.
Part of fair dealing is the obvious duty of candor
required by Lynch I, supra. Moreover, one possessing
superior knowledge may not mislead any stockholder by
use of corporate information to which the latter is
not privy. Delaware has long imposed this duty even
upon persons who are not corporate officers or directors,
but who nonetheless are privy to matters of interest
or significance to their company. Brophy v. Cities Service
Co., Del.Ch., 70 A.2d 5, 7 (1949). With the well-established
Delaware law on the subject, and the Court of Chancery's
findings of fact here, it is inevitable that the obvious
conflicts posed by Arledge and Chitiea's preparation
of their "feasibility study", derived from
UOP information, for the sole use and benefit of Signal,
cannot pass muster.
The Arledge—Chitiea report is but one aspect
of the element of fair dealing. How did this merger
evolve? It is clear that it was entirely initiated by
Signal. The serious time constraints under which the
principals acted were all set by Signal. It had not
found a suitable outlet for its excess cash and considered
UOP a desirable investment, particularly since it was
now in a position to acquire the whole company for itself.
For whatever reasons, and they were only Signal's, the
entire transaction was presented to and approved by
UOP's board within four business days. Standing alone,
this is not necessarily indicative of any lack of fairness
by a majority shareholder. It was what occurred, or
more properly, what did not occur, during this brief
period that makes the time constraints imposed by Signal
relevant to the issue of fairness.
The structure of the transaction, again, was Signal's
doing. So far as negotiations were concerned, it is
clear that they were modest at best. Crawford, Signal's
man at UOP, never really talked price with Signal, except
to accede to its management's statements on the subject,
and to convey to Signal the UOP outside directors' view
that as between the $20–$21 range under consideration,
it would have to be $21. The latter is not a surprising
outcome, but hardly arm's length negotiations. Only
the protection of benefits for UOP's key employees and
the issue of Lehman Brothers' fee approached any concept
of bargaining.
As we have noted, the matter of disclosure to the UOP
directors was wholly flawed by the conflicts of interest
raised by the Arledge—Chitiea report. All of those
conflicts were resolved by Signal in its own favor without
divulging any aspect of them to UOP.
This cannot but undermine a conclusion that this merger
meets any reasonable test of fairness. The outside UOP
directors lacked one material piece of information generated
by two of their colleagues, but shared only with Signal.
True, the UOP board had the Lehman Brothers' fairness
opinion, but that firm has been blamed by the plaintiff
for the hurried task it performed, when more properly
the responsibility for this lies with Signal. There
was no disclosure of the circumstances surrounding the
rather cursory preparation of the Lehman Brothers' fairness
opinion. Instead, the impression was given UOP's minority
that a careful study had been made, when in fact speed
was the hallmark, and Mr. Glanville, Lehman's partner
in charge of the matter, and also a UOP director, having
spent the weekend in Vermont, brought a draft of the
"fairness opinion letter" to the UOP directors'
meeting on March 6, 1978 with the price left blank.
We can only conclude from the record that the rush imposed
on Lehman Brothers by Signal's timetable contributed
to the difficulties under which this investment banking
firm attempted to perform its responsibilities. Yet,
none of this was disclosed to UOP's minority.
Finally, the minority stockholders were denied the
critical information that Signal considered a price
of $24 to be a good investment. Since this would have
meant over $17,000,000 more to the minority, we cannot
conclude that the shareholder vote was an informed one.
Under the circumstances, an approval by a majority of
the minority was meaningless.
Given these particulars and the Delaware law on the
subject, the record does not establish that this transaction
satisfies any reasonable concept of fair dealing, and
the Chancellor's findings in that regard must be reversed.
E.
Turning to the matter of price, plaintiff also challenges
its fairness. His evidence was that on the date the
merger was approved the stock was worth at least $26
per share. In support, he offered the testimony of a
chartered investment analyst who used two basic approaches
to valuation: a comparative analysis of the premium
paid over market in ten other tender offer-merger combinations,
and a discounted cash flow analysis.
In this breach of fiduciary duty case, the Chancellor
perceived that the approach to valuation was the same
as that in an appraisal proceeding. Consistent with
precedent, he rejected plaintiff's method of proof and
accepted defendants' evidence of value as being in accord
with practice under prior case law. This means that
the so-called "Delaware block" or weighted
average method was employed wherein the elements of
value, i.e., assets, market price, earnings, etc., were
assigned a particular weight and the resulting amounts
added to determine the value per share. This procedure
has been in use for decades. However, to the extent
it excludes other generally accepted techniques used
in the financial community and the courts, it is now
clearly outmoded. It is time we recognize this in appraisal
and other stock valuation proceedings and bring our
law current on the subject.
While the Chancellor rejected plaintiff's discounted
cash flow method of valuing UOP's stock, as not corresponding
with "either logic or the existing law" (426
A.2d at 1360), it is significant that this was essentially
the focus, i.e., earnings potential of UOP, of Messrs.
Arledge and Chitiea in their evaluation of the merger.
Accordingly, the standard "Delaware block"
or weighted average method of valuation, formerly employed
in appraisal and other stock valuation cases, shall
no longer exclusively control such proceedings. We believe
that a more liberal approach must include proof of value
by any techniques or methods which are generally considered
acceptable in the financial community and otherwise
admissible in court, subject only to our interpretation
of 8 Del.C. § 262(h), infra. This will obviate
the very structured and mechanistic procedure that has
heretofore governed such matters. See Tri–Continental
Corp. v. Battye, Del.Ch., 66 A.2d 910, 917–18
(1949).
Fair price obviously requires consideration of all
relevant factors involving the value of a company. This
has long been the law of Delaware as stated in Tri–Continental
Corp., 74 A.2d at 72:
The basic concept of value under the appraisal statute
is that the stockholder is entitled to be paid for
that which has been taken from him, viz., his proportionate
interest in a going concern. By value of the stockholder's
proportionate interest in the corporate enterprise
is meant the true or intrinsic value of his stock
which has been taken by the merger. In determining
what figure represents this true or intrinsic value,
the appraiser and the courts must take into consideration
all factors and elements which reasonably might enter
into the fixing of value. Thus, market value, asset
value, dividends, earning prospects, the nature of
the enterprise and any other facts which were known
or which could be ascertained as of the date of merger
and which throw any light on future prospects of the
merged corporation are not only pertinent to an inquiry
as to the value of the dissenting stockholders' interest,
but must be considered by the agency fixing the value.
(Emphasis added.)
* * *
It is significant that section 262 now mandates the
determination of "fair" value based upon "all
relevant factors". Only the speculative elements
of value that may arise from the "accomplishment
or expectation" of the merger are excluded. We
take this to be a very narrow exception to the appraisal
process, designed to eliminate use of pro forma data
and projections of a speculative variety relating to
the completion of a merger. But elements of future value,
including the nature of the enterprise, which are known
or susceptible of proof as of the date of the merger
and not the product of speculation, may be considered.
When the trial court deems it appropriate, fair value
also includes any damages, resulting from the taking,
which the stockholders sustain as a class. If that was
not the case, then the obligation to consider "all
relevant factors" in the valuation process would
be eroded. We are supported in this view not only by
Tri–Continental Corp., 74 A.2d at 72, but also
by the evolutionary amendments to section 262.
* * *
Although the Chancellor received the plaintiff's evidence,
his opinion indicates that the use of it was precluded
because of past Delaware practice. While we do not suggest
a monetary result one way or the other, we do think
the plaintiff's evidence should be part of the factual
mix and weighed as such. Until the $21 price is measured
on remand by the valuation standards mandated by Delaware
law, there can be no finding at the present stage of
these proceedings that the price is fair. Given the
lack of any candid disclosure of the material facts
surrounding establishment of the $21 price, the majority
of the minority vote, approving the merger, is meaningless.
The plaintiff has not sought an appraisal, but rescissory
damages of the type contemplated by Lynch v. Vickers
Energy Corp., Del.Supr., 429 A.2d 497, 505–06
(1981) (Lynch II). In view of the approach to valuation
that we announce today, we see no basis in our law for
Lynch II's exclusive monetary formula for relief. On
remand the plaintiff will be permitted to test the fairness
of the $21 price by the standards we herein establish,
in conformity with the principle applicable to an appraisal—that
fair value be determined by taking "into account
all relevant factors" [see 8 Del.C. § 262(h),
supra]. In our view this includes the elements of rescissory
damages if the Chancellor considers them susceptible
of proof and a remedy appropriate to all the issues
of fairness before him. To the extent that Lynch II,
429 A.2d at 505–06, purports to limit the Chancellor's
discretion to a single remedial formula for monetary
damages in a cash-out merger, it is overruled.
While a plaintiff's monetary remedy ordinarily should
be confined to the more liberalized appraisal proceeding
herein established, we do not intend any limitation
on the historic powers of the Chancellor to grant such
other relief as the facts of a particular case may dictate.
The appraisal remedy we approve may not be adequate
in certain cases, particularly where fraud, misrepresentation,
self-dealing, deliberate waste of corporate assets,
or gross and palpable overreaching are involved. Under
such circumstances, the Chancellor's powers are complete
to fashion any form of equitable and monetary relief
as may be appropriate, including rescissory damages.
Since it is apparent that this long completed transaction
is too involved to undo, and in view of the Chancellor's
discretion, the award, if any, should be in the form
of monetary damages based upon entire fairness standards,
i.e., fair dealing and fair price.
Obviously, there are other litigants, like the plaintiff,
who abjured an appraisal and whose rights to challenge
the element of fair value must be preserved. Accordingly,
the quasi-appraisal remedy we grant the plaintiff here
will apply only to: (1) this case; (2) any case now
pending on appeal to this Court; (3) any case now pending
in the Court of Chancery which has not yet been appealed
but which may be eligible for direct appeal to this
Court; (4) any case challenging a cash-out merger, the
effective date of which is on or before February 1,
1983; and (5) any proposed merger to be presented at
a shareholders' meeting, the notification of which is
mailed to the stockholders on or before February 23,
1983. Thereafter, the provisions of 8 Del.C. §
262, as herein construed, respecting the scope of an
appraisal and the means for perfecting the same, shall
govern the financial remedy available to minority shareholders
in a cash-out merger. Thus, we return to the well established
principles of Stauffer v. Standard Brands Inc., Del.Supr.,
187 A.2d 78 (1962) and David J. Greene & Co. v.
Schenley Industries, Inc., Del.Ch., 281 A.2d 30 (1971),
mandating a stockholder's recourse to the basic remedy
of an appraisal.
III.
Finally, we address the matter of business purpose.
The defendants contend that the purpose of this merger
was not a proper subject of inquiry by the trial court.
The plaintiff says that no valid purpose existed—the
entire transaction was a mere subterfuge designed to
eliminate the minority. The Chancellor ruled otherwise,
but in so doing he clearly circumscribed the thrust
and effect of Singer. Weinberger v. UOP, 426 A.2d at
1342–43, 1348–50. This has led to the thoroughly
sound observation that the business purpose test "may
be * * * virtually interpreted out of existence, as
it was in Weinberger ."
The requirement of a business purpose is new to our
law of mergers and was a departure from prior case law.
See Stauffer v. Standard Brands Inc., supra; David J.
Greene & Co. v. Schenley Industries, Inc., supra.
In view of the fairness test which has long been applicable
to parent-subsidiary mergers, Sterling v. Mayflower
Hotel Corp., Del.Supr., 93 A.2d 107, 109–10 (1952),
the expanded appraisal remedy now available to shareholders,
and the broad discretion of the Chancellor to fashion
such relief as the facts of a given case may dictate,
we do not believe that any additional meaningful protection
is afforded minority shareholders by the business purpose
requirement of the trilogy of Singer, Tanzer, Najjar,
and their progeny. Accordingly, such requirement shall
no longer be of any force or effect.
The judgment of the Court of Chancery, finding both
the circumstances of the merger and the price paid the
minority shareholders to be fair, is reversed. The matter
is remanded for further proceedings consistent herewith.
Upon remand the plaintiff's post-trial motion to enlarge
the class should be granted.
* * *
Reversed and remanded.
Helen M. Bowers & William R. Latham, "Value
of Fairness Opinions in US Mergers and Acquisitions,
1980-2002" (Nov 2004) SSRN
Paper 626321
In the market for corporate control, a potential market
failure of asymmetric information arises if any of the
market
participants (the acquiring or target firms' management,
boards of directors or shareholders) have insufficient
knowledge about the real market value of a target firm.
This failure may be mitigated by the market's participants
choosing to purchase additional information about the
value of the target firm. An opinion by a third party
regarding this value is known as a "fairness opinion."
Although it is often the case that at least one party
to an acquisition obtains a fairness opinion, the issue
of whether they provide any informational value is still
debated. US court rulings have increased the potential
costs to firms and their boards of directors of making
merger and
acquisition decisions without sufficient information,
thus potentially raising the value of fairness opinions.
This paper contains analysis of factors influencing
the decisions of boards to seek fairness opinions in
several thousand corporate control transactions over
the 1980-2002 period. We find significant variation
in fairness opinions associated with the value of the
transaction, the structure of the transaction, the structure
of the industry, the familiarity of the firms with each
other's business, whether the other party to the transaction
has obtained a fairness opinion and the types of other
information obtained by both parties.
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