The Delaware Court of Chancery recently addressed the right of individual dissenting shareholders to settle their appraisal demands. It upheld the ability of a surviving corporation in a merger to settle individual appraisal demands of certain non-appearing former stockholders, while a formal appraisal action was pending, on terms that may not be available to the petitioner and others who sought appraisal and over the objection of the appraisal petitioner, in Mannix v. PlasmaNet, C.A. No. 10502-CB (Del. Ch. July 21, 2015). It has long been the law of Delaware that a defendant in a class action, before a class is certified, may communicate with and settle claims of certain non-appearing putative class members, without the participation or approval of class counsel. Once a class is certified, however, the character of the action changes; communication with absent class members and settlement of their individual claims generally becomes subject to court regulation and the participation of class counsel. Although an appraisal action has many attributes of a certified class action, and notwithstanding the objections of the appraisal petitioner and his counsel, Chancellor Andre G. Bouchard in Mannix ruled that neither the text of Delaware's appraisal statute, 8 Del. C. Section 262, nor the principles underlying the traditional line of demarcation in class actions, prevented the court from concluding that settlement of individual appraisal demands was just.
In Mannix, the petitioner commenced an appraisal proceeding for his 1,700 shares following the cash-out merger of Free Lotto Inc. into PlasmaNet Inc. Collectively, 48 stockholders owning in the aggregate about 3.5 million shares had dissented from the merger, demanded appraisal and were subject to having their claims determined in the proceeding commenced by the petitioner. The company proposed to settle the appraisal demands by offering shares in the surviving corporation subject to the condition that dissenting stockholders certify their status as "accredited investor" under the federal securities laws and dismiss their claims with prejudice. The "accredited investor" certification was necessary because the shares offered in settlement were not registered with the U.S. Securities and Exchange Commission. Four of the non-appearing dissenting stockholders who had demanded appraisal in the aggregate for about 1.8 million shares accepted the offer. The petitioner and other former PlasmaNet stockholders who demanded appraisal collectively for about 1.7 million shares did not accept the offer.
The company moved to dismiss the proceeding as to the four settling non-appearing dissenters. The petitioner objected on several grounds, including:
• The settlement was not available to all shareholders because not all could provide the accredited investor certification.
• Settlement with some but not all would undercut the economics of the appraisal proceeding and undermine the viability of the remedy.
• The company failed to provide the non-appearing dissenters a court-approved statement of claims, defenses and alternatives to settlement.
• The settlement communications did not occur exclusively through petitioner's counsel.
The court acknowledged the analogy between an appraisal proceeding and a class action relied upon by the petitioner in support of his objections with the notable distinction that shareholders seeking appraisal effectively opt in to a class before suit is filed. Delaware law provides that the fair value determined in the petitioner's appraisal proceeding will also establish the fair value of the class of non-appearing appraisal claimants. None of the petitioner's specific objections or concerns accompanying settlement of a class action, however, dissuaded the court from finding that the settlement of the non-appearing dissenters' claims was just.
The court found the settlement did not implicate the "buy off" concerns sometimes involved in the settlement of representative class litigation. The settlement affected only the non-appearing dissenters and would have no legal effect on the petitioner's standing or the ability of the remaining appraisal claimants to pursue the litigation. The court did not find the "accredited investor" certification to be coercive since the offer was made to all claimants and the certification was a lawful constraint required by the federal securities laws. Nor did the court find the economic coercion argument persuasive because the petitioner by filing the appraisal petition for his 1,700 shares assumed the risk the appraisal proceeding might be limited to that amount. Finally, the court rejected the need for the procedural protections requested by the petitioner. The court found the settling claimants were sophisticated enough to exercise their appraisal rights and opt in; as such, they did not need a court-supervised communication or claims analysis before settling their claims.
While the Mannix case should not be read as a green light for appraisal respondents to pick off non-appearing appraisal claimants on coercive or otherwise unfair terms, it provides valuable guidance and authority for the settlement of individual appraisal claims. It thus establishes an important balance between the petitioner and respondent in negotiating a resolution of appraisal claims. The decision affirms the right of appraisal claimants to settle individual claims, and, at least in the case of a non-coercive offer to settle on equal terms, denies the petitioner "hold up" leverage not envisioned by the appraisal statute.