Kemp v. Angel

Delaware Court of Chancery · Corporations

Corporationsfreeze-out mergerfiduciary dutyshort-form mergerpreliminary injunction8 Del. C. § 253short-form mergerminority freeze-out

Facts

Plaintiffs were minority Class A stockholders of Aid, Inc., and alleged that Ina Corporation controlled Aid through ownership of more than a majority, later more than 90%, of its voting stock. Ina first made a public tender offer for the remaining Aid shares at $7 per share and later announced a short-form merger under 8 Del. C. § 253 through its wholly owned subsidiary, Ina Capital Corporation, that would eliminate the remaining minority for $14 per share. Plaintiffs alleged this was part of a premeditated plan to eliminate the minority for grossly inadequate consideration and that defendants made false or incomplete disclosures about merger plans, Aid's prospects, directors' intentions, and the corporation's increasing revenues, income, and book value. Defendants responded that the merger served business purposes and that $14 per share was fair based on an independent valuation.

Issue

May the Court of Chancery preliminarily enjoin a proposed short-form merger under 8 Del. C. § 253 when minority stockholders allege that the transaction is part of an unfair freeze-out by a controlling stockholder and that the minority will not be treated fairly? More specifically, is the court confined to appraisal under Stauffer, or may it scrutinize the transaction for fiduciary fairness and enjoin it pending trial?

Rule

Even in a merger under 8 Del. C. § 253, the fiduciary obligations of a controlling stockholder to minority stockholders are not displaced by mere compliance with statutory formalities. Where minority stockholders allege unfair freeze-out treatment, the court may closely scrutinize the transaction for entire fairness, and preliminary injunctive relief is appropriate when there is a reasonable probability plaintiffs may prove at trial that the merger is not entirely fair and because consummation of a merger is difficult to undo.

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

Granite Ridge Holdings owns 92% of the voting stock of Cedar Labs, a Delaware corporation based in Denver. Granite forms a wholly owned subsidiary and announces a short-form merger to cash out Cedar's remaining stockholders at $18 per share; the minority sues in Delaware, alleging the controller planned all along to eliminate them and offered an unfair price after concealing Cedar's improving financial outlook.

Which is the strongest argument for the minority stockholders at the preliminary injunction stage?

Explanation. The majority opinion holds that compliance with 8 Del. C. § 253 does not displace the fiduciary obligations owed by a controlling stockholder to the minority. When plaintiffs allege an unfair freeze-out, the court may examine the transaction for entire fairness and may grant a preliminary injunction if there is a reasonable probability they will prove unfair treatment at trial, especially because a completed merger is difficult to unwind. (Derived from Kemp v. Angel (n.d.).)