Cavalier Oil Corporation v. Harnett

Supreme Court of Delaware · 1989 · Corporations

564 A.2d 1137 (1989)

Updated August 22, 2026

CorporationsAppraisalFair ValueMinority DiscountRes Judicata8 Del. C. § 262going concernmarketability discount

Facts

Harnett was the sole minority shareholder of EMSI, a closely held Delaware corporation, and his shares were cashed out in a short-form merger into Cavalier. Before the merger, Billman and McCuistion arranged for EMI to perform mortgage servicing business that Harnett claimed had been intended for EMSI, allegedly diverting a corporate opportunity and reducing EMSI's value. Earlier federal litigation between the parties ended in a settlement and dismissal that expressly preserved facts affecting the value of Harnett's stock for later use. In the appraisal proceeding, the Court of Chancery considered the diverted business in valuing EMSI, refused to apply a minority discount, rejected part of Harnett's expert terminal-value analysis, and declined to adjudicate Harnett's share-dilution claim.

Issue

Whether, in a Delaware appraisal proceeding, the court could consider facts underlying Harnett's corporate opportunity claim despite Cavalier's res judicata defense and despite the usual limits of appraisal, and whether the court properly refused to apply a minority discount and to entertain a claim seeking reallocation of shares. The case also asked whether the Court of Chancery properly rejected part of Harnett's expert valuation evidence.

Rule

In a Delaware appraisal under 8 Del. C. § 262, the court determines the fair value of the dissenting shareholder's proportionate interest in the corporation as a going concern by valuing the corporation itself and then determining the shareholder's proportionate share, without applying a minority or marketability discount at the shareholder level. Although appraisal is ordinarily limited to valuation and does not encompass separate fiduciary-duty or fraud claims, all relevant factors bearing on value may be considered, and under unusual circumstances facts underlying a derivative-like claim may be considered when the parties preserved those facts for appraisal purposes and the wrongdoing relates directly to share value rather than to the validity of the merger itself. A dispute over the number of shares owned, such as a dilution claim requiring reallocation among shareholders, is outside the scope of appraisal.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

Pine Harbor Data Services, a closely held Delaware corporation based in Wilmington, is merged into an affiliate in a cash-out merger. Nora Patel, who owns 3% of the company, seeks appraisal, and the surviving corporation argues her shares should be discounted because she lacked control over corporate decisions.

How should the appraisal court treat the corporation's argument?

Explanation. In a Delaware appraisal, the court first values the corporation as an operating entity and then gives the dissenting stockholder her proportionate share of that value. A shareholder-level minority discount would improperly penalize the stockholder for lack of control and confer a windfall on the majority. The majority opinion rejects that approach.