Singer v. Magnavox Co.

Supreme Court of Delaware · 1977 · Corporations

CorporationsMergersFiduciary DutiesFreeze-out MergersDelaware§ 251 mergercash-out mergerfreeze-out

Facts

North American, through its wholly owned acquisition subsidiary Development, made a tender offer for Magnavox stock, increased the price from $8 to $9 per share, and acquired about 84.1% of Magnavox's common stock. After obtaining control, Development caused a new subsidiary, T.M.C., to be formed and merged into Magnavox under 8 Del. C. § 251, with Magnavox minority shareholders cashed out at $9 per share. The Magnavox board approved the merger, and the proxy materials disclosed that Development already held enough shares to assure approval and that dissenters could seek appraisal under § 262. Plaintiffs alleged that the merger's sole purpose was to eliminate the minority at a grossly inadequate price and thereby give North American sole ownership of Magnavox.

Issue

Whether a complaint states a claim when it alleges that a parent-controlled § 251 cash-out merger was effected solely to freeze out minority stockholders, even though the merger complied with Delaware's statutory merger procedures. Also, whether the minority shareholders stated a claim under the Delaware Securities Act based on alleged misstatements or omissions in proxy materials connected with the merger.

Rule

Compliance with 8 Del. C. § 251 does not insulate a merger from judicial review for breach of fiduciary duty. A Delaware court must closely examine a § 251 cash-out merger alleged to have the sole purpose of freezing out minority stockholders, and such a merger is an abuse of the corporate process and a violation of the majority's fiduciary duty. Even where the sole-purpose freeze-out is not shown, the majority still bears fiduciary obligations and the transaction remains subject to scrutiny for entire fairness. Appraisal under § 262 is not the exclusive remedy for such a fiduciary-duty claim. The Delaware Securities Act does not apply merely because the corporations are Delaware corporations or because the merger vote occurred in Delaware.

🔒

See the holding & full analysis

Create a free KwikCourt account to unlock the rest of this brief — and practice the case.

The court's holding and reasoning
Doctrine tests, pitfalls & exam hypotheticals
10 practice questions + 4 AI-graded essays on this case

Free sample · practice this case

Test yourself

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

Lakeview Devices, Inc., a Delaware corporation based in Cleveland, became 82%-owned by Harbor Peak Holdings after a tender offer. Harbor Peak then formed a wholly owned merger subsidiary and caused Lakeview to merge under Delaware's general merger statute, paying the remaining shareholders only cash. A complaint alleges the merger's only purpose was to eliminate the public minority so Harbor Peak could own the company outright.

If the controller moves to dismiss on the ground that Delaware merger law permits cash consideration in a merger, how should the court rule?

Explanation. The majority opinion holds that a § 251 cash-out merger made for the sole purpose of freezing out minority stockholders is an abuse of the corporate process and violates the majority's fiduciary duty. Statutory authorization for cash consideration does not foreclose equitable review. A pleading alleging that sole improper purpose is sufficient to state a claim.