Weinberger v. UOP, Inc.

Supreme Court of Delaware · 1983 · Corporations

CorporationsCash-out mergersControlling shareholder fiduciary dutiesAppraisalmajority shareholderparent-subsidiary mergercash-out mergerentire fairness

Facts

Signal already owned 50.5% of UOP and decided to acquire the remaining minority shares through a cash-out merger at $21 per share. Two directors who served on both Signal's and UOP's boards prepared a feasibility study for Signal concluding that buying the minority shares at up to $24 per share would be a good investment, but that study was not disclosed to UOP's outside directors or minority shareholders. Signal set a compressed timetable, UOP obtained a hurried Lehman Brothers fairness opinion, and the proxy materials did not disclose the undisclosed study or the rushed circumstances surrounding the fairness opinion. The merger was later approved by a majority of the minority shares voting, and each minority share was converted into a right to receive $21 cash.

Issue

Whether this controlling-shareholder cash-out merger satisfied Delaware's fairness requirements where material information was withheld from UOP's outside directors and minority shareholders, and whether the minority vote shifted the burden of proving unfairness to the plaintiff. The court also considered the proper valuation remedy and whether Delaware still required a separate business purpose for such a merger.

Rule

When directors stand on both sides of a transaction, they bear the burden of proving the transaction's entire fairness, which includes fair dealing and fair price. A plaintiff challenging a cash-out merger must plead specific acts of fraud, misrepresentation, or other misconduct to demonstrate unfairness, and must show some basis for invoking the fairness obligation; but if the transaction was approved by an informed vote of a majority of the minority shareholders, the burden shifts entirely to the plaintiff to show unfairness, while those relying on the vote must prove complete disclosure of all material facts. In valuing shares, Delaware courts must consider any generally accepted valuation techniques admissible in court and all relevant factors under 8 Del. C. § 262(h), not just the Delaware block method, and the business purpose requirement of Singer and its progeny is no longer Delaware law.

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

Granite Harbor Systems, a Delaware corporation based in Milwaukee, is 62% owned by North Basin Holdings. North Basin proposes a cash-out merger at $18 per share. Before the vote, North Basin circulates a proxy that omits an internal memorandum prepared by dual directors concluding that buying out the minority at up to $22 would still be an attractive investment for North Basin; a majority of the minority shares voting approve the deal.

In a suit by former minority stockholders challenging the merger, who bears the burden on entire fairness?

Explanation. When fiduciaries stand on both sides of a transaction, they must prove entire fairness. That burden shifts entirely to the plaintiff only if the transaction was approved by an informed vote of a majority of the minority. Those relying on the vote must prove complete disclosure of all material facts. Omitting an internal study indicating the controller would profit even at a higher price is material, so the vote is not informed and no burden shift occurs.