Glassman v. Unocal Exploration Corp.

Supreme Court of Delaware · 2001 · Corporations

CorporationsShort-form mergerFiduciary dutiesAppraisalDelaware§ 253short-form mergerparent-subsidiary merger

Facts

Unocal Corporation owned approximately 96% of Unocal Exploration Corporation (UXC). After low natural gas prices reduced revenues and earnings in 1991, Unocal decided that eliminating UXC's minority stockholders would reduce taxes and overhead. Although § 253 did not require it, Unocal and UXC created special committees, and the UXC committee retained advisors and agreed to a merger exchange ratio of .54 shares of Unocal stock for each UXC share. The merger was then effected under 8 Del. C. § 253, and the notice and prospectus stated the merger terms and informed former UXC stockholders of their appraisal rights.

Issue

When a parent corporation effects a short-form merger under 8 Del. C. § 253 to eliminate minority stockholders, must it satisfy the fiduciary duty of entire fairness, or is appraisal the minority's exclusive remedy absent fraud or illegality? Also, what disclosure duty remains in that setting?

Rule

A parent corporation effecting a short-form merger under 8 Del. C. § 253 does not have to establish entire fairness. Because the statute authorizes a summary process that omits traditional fair-dealing features, and absent fraud or illegality, the exclusive remedy of a dissenting minority stockholder is appraisal. However, the duty of full disclosure remains: minority stockholders must receive all factual information material to deciding whether to accept the merger consideration or seek appraisal. In appraisal, fair value must be determined based on all relevant factors, including damages and elements of future value where appropriate.

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

Redwood Energy Holdings, a Delaware corporation based in Houston, owns 93% of Basin Field Services, a Delaware subsidiary operating in New Mexico. Redwood effects a merger under 8 Del. C. § 253 and cashes out the minority without a vote, and several minority stockholders sue in Delaware seeking rescission on the ground that the price was unfair and no negotiations occurred.

What is the strongest response to the stockholders' claim?

Explanation. Under the majority opinion, a parent using Delaware's short-form merger statute does not have to establish entire fairness. Section 253 authorizes a unilateral, summary process without the traditional fair-dealing features of negotiation, notice, board approval, or vote. Therefore, absent fraud or illegality, a dissatisfied minority stockholder's exclusive remedy is appraisal, not rescission or a free-standing entire fairness action.