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Chancery Closing the Door to Multidistrict Litigation

Authored by Edward M. McNally
This article was originally published in the Delaware Business Court Insider | October 9, 2013 

There is much agitation over multiforum litigation. Both the typical defendants in such cases, corporations involved in a merger, and the courts decry what they see as duplicative suits over the same dispute in two or more jurisdictions. The past legal rules that might have resolved the issue of what case goes forward no longer seem to work. The Delaware Court of Chancery is now moving forward to develop new approaches to resolve the problems presented by multiforum litigation over the same basic dispute. More ›

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Supreme Court Establishes New Remedy For Disclosure Violation

Posted In Appraisal

Berger v. Pubco Corporation, Del Supr. C.A. 509, 2008 (July 9, 2009)

In this precedent setting decision, the Supreme Court holds that stockholders who are cashed out in a short-form merger may bring a class action for damages when there are violations of the duty of disclosure in the materials sent to them notifying them of the merger. In prior decisions, the Court of Chancery had reached somewhat inconsistent results in such cases, granting a quasi-appraisal remedy, but sometimes requiring stockholders to opt-in to be part of the stockholder group obtaining appraisal rights and also requiring an escrow of the merger consideration.

Here, the Supreme Court rejected both of those limits on the remedy. Instead, it held that all the minority stockholders had the right to be part of a class entitled to appraisal rights, subject to a right to opt-out of the class. In addition, stockholders do not have to escrow any of the merger consideration while the action is pending.

This result creates a "free rider" issue as there is little incentive for stockholders to opt-out. While it is possible the trial court will decide the fair value of their stock in the appraisal proceedings is less than the merger consideration, for smaller stockholders, the amounts in question may not justify the company enforcing any right to a refund.

Of course, the way out of this dilemma is to provide fair disclosure in the first place.

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