Short-Form Mergers

Authorizes the board of directors of a Delaware corporation that owns 90 per-cent or more of each of the outstanding classes of stock of a subsidiary that are entitled to vote on a merger to merge the subsidiary into itself without any requirement for action to be taken by the board of directors of the subsidiary

Case extracts

Per DGCL § 253, a majority stockholder who owns at least 90% of a companys shares can eliminate the minority stockholders "without notice, vote, or other traditional indicia of procedural fairness."
Absent fraud or illegality, the exclusive remedy of a minority stockholder is appraisal
Affirms Chancery Court's ruling that the entire fairness standard does not apply in a short-form merger

Plaintiffs had argued that entire fairness should apply

Standard that is typically applied to cashout mergers effected by controlling stockholders under the long-form merger statutes, DGCL §§ 251 and Section 252
Plaintiffs relied on:
Weinberger v UOP (Del 1983)
Bershad v Curtiss-Wright (Del 1987)
Kahn v Lynch Communications Systems (Del 1994)
Which were mergers under the Delaware long-form statutes but which seemed to support that the entire fairness standard of review should apply to short-form mergers
Court reasoning is driven by need to give independent legal significance to DGCL § 253

Fiduciary duty of disclosure still applies to appraisal rights
Decision doesn't address circumstances where parent needs subsidiary board's co-operation to reach 90%

Controlling stockholder used a tender offer to reach 90%
Followed by a second-step short-form merger
V.C. Noble denied plaintiff's request to enjoin the merger
Controlling shareholder was under no obligation to offer any particular price for the minority-held stock, absent evidence that material information about the offer has been withheld or misrepresented, or that the offer is coercive in some significant way, and held that the defendants could not be required to show the entire fairness of their tender offer

Entire Fairness / Going Private

In re Cysive (Del Ch 2003) 836 A.2d 531

V.C. Strine
Reaffirms that entire fairness standard applies to going private long-form mergers
CEO with 40% of voting equity was in control
Buyout followed several months effort to find a third party buyer

CEO's buyout satisfied entire fairness standard:

Special committee engaged in effective negotiations
CEO acted in good faith
Independent directors were in the majority
Competing offers were sought both before and after execution of merger agreement
CEO's offer was at a premium to market

CFO was criticized for not giving the special committee information he thought was unreliable

Court suggests changes to procedural requirements for applying entire fairness standard

In In re Emerging Communications, Inc. Shareholders Litigation,1 the Delaware Chancery Court issued a warning to directors and controlling stockholders regarding their duties to minority stockholders in a going-private transaction, including denying one unaffiliated director the benefit of the corporate exculpation provision. In holding that director, an investment banker, personally liable, the court acknowledged that although he did not actively collude with the majority stockholder, because of his financial and industry expertise he should have known that the price was unfair to the minority and should have voted against the transaction

"Topping Up" Precedent

Next Level / Motorola

Exercise of convertible preferred
Schedule 13D Amendment 4.16.03
Motorola's first step tender offer increased its Next Level ownership to 89% from 74%
Motorola then converted Next Level preferred stock to common stock to achieve 90% ownership
Completed second-step as a short-form merger
per DGCL §253

Appraisal Notice

Required by DGCL §262(d)(2)

Held that fiduciary duty of disclosure requires that a notice of short-form merger either be accompanied by

detailed disclosures or
summary financial information and adequately advise stockholders where and how to obtain more detailed information

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