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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
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Court of Chancery Finds Remedy for Breach of Fiduciary Duty Identical to Appraisal Award
Delaware Open MRI Radiology Associates, P.A. v. Kessler, C.A. No. 275-N, 2006 WL 1215096 (Apr. 26, 2006). This case was described by Vice Chancellor Strine as "another progeny of one of our law's hybrid varietals: the combined appraisal and entire fairness action." The court was tasked with determining whether the share price in a squeeze-out merger was fair, and, if not, what the extent of the underpayment to the minority shareholders was. The court found that the merger price was unfair, and finding no difference between the award the petitioners/plaintiffs would receive in appraisal or in equity, the court awarded an amount equivalent to petitioners' pro rata share of the company's appraisal value on the date of the merger.
The majority and minority shareholders in this case were all radiologists who formed Delaware Radiology. The squeeze-out merger at Delaware Radiology occurred after the radiologists' underlying radiology practice split up into two groups: the majority group, which was comprised of five stockholders and controlled 625.5% of the Delaware Radiology shares (the "Broder Group"), and the minority group, which was comprised of three stockholders owning the remaining 37.5% of the Delaware Radiology shares (the "Kessler Group"). The members of the Kessler Group filed a complaint alleging that the members of the Broder Group, all of whom were directors of Delaware Radiology and Delaware Acquisition, the acquisition vehicle, had breached their fiduciary duties by effecting the merger in a procedurally and substantively unfair manner. To reach a fair value award, the court had to determine Delaware Radiology's value as a going concern on the merger date and award the Kessler Group the percentage of that value that tracks its members' pro rata interest in the company on that date. As for the equitable action premised on the assertion that the conflicted merger was unfair, the court found that there was no question that the merger implicated the entire fairness doctrine, as the Broder Group comprised all the members of the Delaware Radiology board and the acquiring company's board, and used its majority control to vote through the merger. Nor did the Broder Group use any of the procedural devices that could temper the application of the entire fairness standard, such as a special negotiating committee of disinterested and independent directors or a majority of the minority stockholder vote provision. Therefore, the Broder Group had the burden to prove the entire fairness of the merger, i.e., that the conflicted merger proponents proceeded in a manner that was both procedurally and substantively fair. The court found that the Broder Group breached its fiduciary duty and used its control of Delaware Radiology to obtain for itself an unfair financial advantage. The remedy for that claim, however, was identical to the appraisal award, a total of $4,984,838.71. The appraisal award was the obligation of Delaware Radiology, as the surviving entity in the merger, but the equitable award was the obligation of the Broder Group, jointly and severally. The decisions was also interested in its discussion of what future events would be taken into account in the valuation. Fiding that sevetal expansion plans were well aware of the majority owner at the time of the merger, the court included their value in the fair value it found.