Rosenblatt v. Getty Oil Co.

Supreme Court of Delaware · Corporations

Corporationsfreeze-out mergersentire fairnessdisclosurevaluationmajority shareholdermergerminority shareholders

Facts

Getty directly owned 7.42% of Skelly and controlled Mission, which held 72.6% of Skelly, so Getty stood on both sides of the merger. Getty and Skelly negotiated a stock-for-stock merger over several months, each using investment bankers and substantial internal resources, and they ultimately agreed to a .5875 Getty-for-Skelly exchange ratio after adversarial bargaining. The parties separately negotiated surface asset values and, when they reached impasse over subsurface reserve valuation variables, jointly delegated the final subsurface valuation to DeGolyer and MacNaughton, an experienced petroleum engineering firm, with the understanding that its methods would remain undisclosed and its valuation binding. Skelly's minority shareholders approved the merger by an informed vote, and plaintiffs later challenged the fairness of the price, the delegation to D & M, and the adequacy of the proxy statement.

Issue

Whether Getty, as Skelly's controlling shareholder, proved the merger was entirely fair in both dealing and price; whether the burden of proof shifted after approval by an informed majority of the minority; whether delegating final subsurface valuation to D & M was a valid exercise of business judgment; and whether the proxy statement omitted material facts by not emphasizing the delegation and confidentiality of D & M's methods.

Rule

When a controlling shareholder stands on both sides of a merger, the transaction is reviewed for entire fairness, encompassing both fair dealing and fair price. An informed vote of a majority of the minority shareholders shifts to plaintiffs the burden of proving unfairness, though the controller retains the burden of showing complete disclosure of all material facts relevant to that vote. Delaware Block remained a permissible valuation method, though not the exclusive one after Weinberger; boards may delegate valuation tasks as a matter of business judgment when acting independently and on an informed basis; and disclosure is sufficient if omitted facts are not material under the TSC Industries standard, meaning there is no substantial likelihood a reasonable shareholder would view them as significantly altering the total mix of information.

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Granite Ridge Energy, a Delaware corporation based in Houston, controls 78% of Prairie Basin Fuels through voting power and proposes a stock-for-stock merger in which Prairie will disappear into Granite Ridge. After receiving a proxy that fully discloses the negotiations, valuation materials, and fairness opinions, 64% of Prairie’s unaffiliated shares vote in favor of the merger.

In a later fiduciary-duty challenge by Prairie’s minority stockholders, which statement best describes the burden of proof?

Explanation. When a controller stands on both sides of a merger, entire fairness governs. But an informed vote of a majority of the minority shifts the burden of proving unfairness to the plaintiffs. The controller nevertheless retains the burden of showing complete disclosure of all material facts relevant to that vote. The vote does not eliminate fairness review altogether, and the majority opinion did not require that the transaction be expressly conditioned on minority approval for burden shifting.