Dismissed Dell Appraisal Claimants Settle With
Company
Brett M. McCartney,
Delaware Business Court Insider
October 19, 2016
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Brett McCartney |
Appraisal litigation has been a topic at the forefront of the minds of
many legal practitioners over the past few years. Recently, amendments
to Section 262 of Delaware's General Corporation Law went into effect
that were effectuated to eliminate de minimis appraisal claims while
also allowing companies to make a pre-judgment payment to dissenting
stockholders to reduce interest costs in connection with appraisal
litigation. The Delaware Court of Chancery authored several opinions
concerning appraisal arbitrage and the technical requirements of
Section 262. There have even been unique appraisal cases where the
court discussed the circumstances surrounding the proposed settlement
of only factions of the appraisal class.
The In
re Appraisal of Dell litigation presented an
atypical circumstance where settlement terms agreed to between the
company and a group of appraisal petitioners were not offered to the
other stockholders in the appraisal class. The appraisal petitioners
settling their action were comprised of a variety of financial
institutions, including certain funds affiliated with T. Rowe Price &
Associates Inc. (the settling petitioners). The settling petitioners'
appraisal actions had previously been dismissed for separate technical
reasons. In its July 13, 2015, decision, the Court of Chancery held
that a portion of the settling petitioners did not satisfy the
continuous holder requirement of Section 262. Instead, the court found
that the record holder of the shares did change between the time of
the appraisal petition and the effective date of the merger. The
court, noting that the change in record holder status was not
knowingly perpetrated by the beneficial holders, reluctantly granted
summary judgment in favor of the defendant and dismissed the appraisal
claims of nearly one million shares of Dell common stock.
Subsequently, on May 11, 2016, the Court of Chancery held that the
record demonstrated that the remaining settling petitioners' shares
were voted in favor of the Dell merger, in contravention of the
express requirement under Section 262 that an appraisal petitioner has
not consented to the merger. As a result, the court granted the
defendant's motion for summary judgment and dismissed the remaining
settling petitioners' appraisal claims.
Nevertheless, on June 24, 2016, the company and the settling
petitioners entered into a settlement agreement whereby the settling
petitioners would receive the merger consideration plus a modicum of
interest in exchange for releasing their appellate rights. On June 27,
the court held a teleconference with counsel for Dell and counsel for
the settling petitioners to discuss how this unique settlement would
work. During the conference, the settlement consideration was
described as the merger consideration and "between 2 and 3 percent
interest, but the grand total is 88 cents per share, and its $28
million in the aggregate." For point of reference, the surviving
appraisal petitioners in Dell were awarded $17.62 per share, which
represented a $3.87 per share increase over the merger consideration
of $13.75 per share. The discussion turned to who should receive
notice of the settlement. The court explained that appraisal actions,
while not class actions, are in the nature of a class action. "And so
what that means is someone like me has to watch out for surreptitious
buy-offs or taking out the big holder or sweetheart deals, or things
like that. And the main way we police against that is just by making
sure that other folks have notice and the opportunity to take the same
deal."
However, the parties and the court discussed the economics of the
offer the settling petitioners accepted in contrast to what the
remaining appraisal petitioners could receive. For instance, the
settling petitioners' counsel explained that even if the Supreme Court
reversed the Court of Chancery's decision and held that the merger
consideration was the fair value on the date of the merger, the
remaining appraisal petitioners would still have accrued interest
accruing at the statutory rate that would exceed the level of
consideration represented in this offer. Because of that, the parties
and the court discussed whether notifying the other appraisal
petitioners of the offer would create undue confusion without
providing value over what those appraisal petitioners are already
entitled to. Ultimately, the court was concluded that on the facts
presented that Dell did not need to extend the offer accepted by the
settling petitioners to the other appraisal claimants. The court held
that by its calculations, which were consistent with Dell and the
settling petitioners, under no set of circumstances would the
consideration being provided to the settling petitioners be more
favorable to other appraisal claimants than an adverse outcome on
appeal, in which the nonsettling petitioners would receive the amount
advocated by Dell at trial plus an award of interest at the statutory
rate. In order to avoid potential confusion relating to the offer, the
court only required that the parties to the settlement agreement
promptly inform counsel to the nonsettling appraisal claimants about
the conference with the court and the settlement agreement.
This
decision lays out a rather unique, and unlikely to be common, set of
circumstances most appraisal practitioners will not face. Still, this
decision highlights the lack of a bright-line rule regarding appraisal
settlements with the court's 2015 decision in Mannix
v. PlasmaNet, providing another unique set of
circumstances. In Mannix, the court approved, over objection,
the settlement of appraisal claims which was conditioned upon the
claimants being accredited investors despite the fact that even if the
offer was made to all claimants some could not satisfy the accredited
investor standard. This most recent decision in Dell and last year's
decision in Mannix highlight the nuanced nature of appraisal
settlements and should be kept in mind as the amount of appraisal
litigation grows.
Brett M. McCartney
(bmccartney@morrisjames.com)
is a partner at Morris James in Wilmington and a member of its
corporate and fiduciary litigation group. He practices primarily in
the Delaware Court of Chancery and Delaware Superior Court and focuses
on corporate governance and complex commercial litigation, stockholder
litigation, fiduciary duties, alternative entity disputes, class
action, and derivative litigation.
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