Rabkin v. Hunt Chemical Corporation

Supreme Court of Delaware · 1985 · Corporations

CorporationsCash-out mergersEntire fairnessAppraisal remedyFiduciary dutyentire fairnessfair dealingfair price

Facts

Olin acquired 63.4% of Hunt stock at $25 per share under an agreement requiring substantially equivalent value if Olin acquired the remaining shares within one year. Internal Olin documents and allegations in the complaints indicated that Olin always anticipated acquiring the minority shares, but delayed doing so until after the one-year period and then offered $20 per share. Olin obtained a fairness opinion based on information supplied by Olin and announced the merger before Hunt's special committee reviewed it. The Hunt special committee ultimately recommended the merger at $20 even though Merrill Lynch advised that the likely value range was $19 to $25 per share.

Issue

Whether, under Weinberger, minority stockholders challenging a cash-out merger are limited to appraisal when they allege not deception in disclosure but specific acts of procedural unfairness and unfair dealing that may have substantially affected the merger price. Also, whether such allegations were sufficient to survive a motion to dismiss.

Rule

In a cash-out merger, appraisal is ordinarily the financial remedy, but it is not the exclusive remedy where plaintiffs plead specific acts of fraud, misrepresentation, self-dealing, deliberate waste, gross and palpable overreaching, or other unfair dealing. Complaints alleging faithless acts constituting breaches of fiduciary duty that are reasonably related to and have a substantial impact on the price offered may proceed beyond dismissal, while claims attacking only judgmental factors of valuation belong in appraisal.

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Granite Vale Industries, a Delaware corporation based in Cleveland, bought 68% of Harbor Specialty Plastics from a controlling blockholder for $40 per share under an agreement stating that if Granite Vale acquired the remaining shares within 12 months, the minority would receive consideration substantially equivalent to $40. Internal emails later surfaced showing Granite Vale had planned from the start to acquire 100% but waited until the 12-month period ended, then proposed a cash-out merger at $31 per share.

If the minority stockholders sue in Delaware alleging that Granite Vale deliberately delayed the merger to avoid the 12-month price protection, what is the strongest argument against dismissal at the pleading stage?

Explanation. The majority held that appraisal is ordinarily the financial remedy in a cash-out merger, but not the exclusive remedy when plaintiffs plead specific acts of unfair dealing or fiduciary misconduct reasonably related to and substantially affecting the price. Allegations that the controller intentionally timed the merger to evade a price-protection commitment are the kind of procedural unfairness that can survive dismissal. The absence of a legal duty to merge sooner does not defeat a claim if the conduct is alleged to be inequitable.