Lynch v. Vickers Energy Corp.

Supreme Court of Delaware · 1981 · Corporations

CorporationsFiduciary dutiesTender offersRemediesmajority stockholdercomplete candorfiduciary dutytender offer

Facts

Vickers, the majority stockholder of TransOcean and a wholly owned subsidiary of Esmark, acquired additional TransOcean shares through a tender offer at $12 per share. In the prior appeal, the Delaware Supreme Court held that Vickers owed minority stockholders a fiduciary duty of complete candor and had failed to disclose two material facts: a management engineer's substantially higher net asset valuation and Vickers management's authorization to buy TransOcean stock in the market for up to $15 per share shortly before the tender offer. On remand, the Chancellor valued the shares using an appraisal-type formula and concluded that the stock was worth $11.85 per share, so the stockholders had not been damaged by receiving $12. By the time of this appeal, TransOcean had been merged into Esmark, making restoration of the original transaction impracticable.

Issue

When a majority stockholder breaches its fiduciary duty of complete candor in a tender offer to minority stockholders, may the court limit relief by using an appraisal-style out-of-pocket valuation model, or must equity provide a different remedy? If rescission is no longer feasible, what measure of damages applies?

Rule

A claim based on breach of fiduciary duty by a majority stockholder is not limited to the appraisal-style or out-of-pocket measure used in a misrepresentation case such as Poole. Where rescission would be appropriate but is impracticable because the stock has been disposed of or corporate changes have intervened, equity may award rescissory damages measured by the equivalent value of the stock at the time of resale or judgment, so as to deprive the fiduciary of the benefit obtained through the breach.

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Harbor Peak Holdings owns 72% of Mesa Basin Resources, a Nevada corporation. In a tender offer to Mesa Basin's minority stockholders, Harbor Peak omits internal information showing management expected to pay substantially more for shares in market purchases; years later, after liability for breach of fiduciary duty of complete candor is established, the trial court values the shares as of the tender date using an appraisal-style blend of asset, market, and earnings value and finds no damages because the offer price exceeded that figure.

Which is the best argument for the minority stockholders on appeal?

Explanation. When liability rests on a majority stockholder's breach of fiduciary duty in a tender offer, the plaintiff is not confined to the appraisal-style or out-of-pocket measure used in a misrepresentation case. The majority opinion rejected reliance on appraisal methodology because it excludes gains enjoyed by the fiduciary from acquiring the shares. Equity may instead grant rescission or its monetary equivalent. (Derived from Lynch v. Vickers Energy Corp. (n.d.).)