Appraisal rights have been the subject of increased focus in the current, post-Corwinenvironment, in which a fully-informed noncoerced stockholder vote suffices to dispose of most M&A challenges. In two recent decisions, the Delaware Court of Chancery considered attempts by stockholder-plaintiffs to expand the scope of transactions subject to appraisal rights. In both cases, the court reinforced that appraisal rights are not available in transactions that do not satisfy 8 Del. C. Section 262’s express criteria. In doing so, the court rejected stockholder-plaintiffs’ arguments that appraisal rights should be available in the circumstances.
Akile v. Rite Aid, C.A. No. 2018-0305-AGB (Del. Ch. May 9, 2018) (Transcript).
In early May, the Court of Chancery declined to expedite an M&A challenge premised upon Rite Aid Corp.’s (Rite Aid) alleged failure to disclose that its proposed acquisition by Albertsons Companies, Inc. (Albertsons) triggered appraisal rights.
The acquisition at issue is to be effected by a merger between Rite Aid and a wholly owned subsidiary of Albertsons. Under the merger agreement, each share of Rite Aid stock will be exchanged for a partial share of Albertsons common stock, plus (either an additional fractional share of Albertsons stock or cash, at the election of each stockholder.
While Rite Aid is publicly traded, rendering Section 262(b)(1)’s “market out” exception potentially apt, the Court considered whether the option to receive cash in lieu of a fractional share implicated Section 262(b)(2)(b), which restores appraisal rights where stockholders “are required by the terms of an agreement of merger” to accept anything other than certain specified consideration, including publicly traded stock. While it was contemplated that Albertsons stock would be publicly traded by the merger date, the plaintiff argued that the cash option may be worth materially more than the fractional share. In that case, the plaintiff argued, as a practical matter Rite Aid stockholders would be required to accept cash, and appraisal rights should be available.
The court disagreed, reasoning that the plaintiff did not have a “colorable claim” sufficient to warrant expedited proceedings. Following Court of Chancery precedent, the court reasoned that Section 262 “makes appraisal rights available on a transactional and classwide basis—not on a stockholder-by-stockholder basis[;]” accordingly, the fact a Rite Aid stockholder could elect to receive just publicly traded stock was dispositive, (citing Kreiger v. Wesco Financial Corp., 30 A.3d 54 (Del. Ch. 2011) (holding appraisal rights were not available where target stockholders could choose to accept publicly traded stock)). The court acknowledged that while it is “theoretically possible” that stockholders could be coerced to choose a cash option if it is “drastically more valuable than the stock stub[,]” no such compelling concerns were present here in light of disclosures that Rite Aid’s financial adviser estimated the implied value of the fractional share to be greater than the value of the cash option. The court accordingly denied the plaintiff’s motion to expedite for lack of a colorable claim, signaling the complaint’s vulnerability to a dispositive motion.
City of North Miami Beach General Employees’ Retirement Plan v. Dr Pepper Snapple Group, C.A. No. 2018-0227-AGB (Del. Ch. Jun. 1, 2018).
On June 1, the Court similarly held that a reverse triangular merger involving sale of control of Dr Pepper Snapple Group, Inc. (Dr Pepper) to the ultimate owners of Keurig Green Mountain, Inc. (Keurig) did not trigger appraisal rights. In the transaction, a wholly-owned subsidiary of Dr Pepper will merge with an entity that owns Keurig (Maple Parent), which will survive the merger as a wholly-owned subsidiary of Dr Pepper. The pre-merger stock of Maple Parent will be converted into the right to receive shares of newly-issued Dr Pepper stock amounting to an 87 pecent ownership interest in Dr Pepper. Maple Parent will declare a $9 billion dividend to its new owner, Dr Pepper. That payment will be used to make a $103.75 special dividend to Dr Pepper’s pre-transaction public stockholders, who will in aggregate retain 13 percent ownership of Dr Pepper after the transaction.
Section 262(b) provides inter alia that appraisal rights are “available for the shares of any class or series of stock of a constituent corporation” in an eligible merger. Although the merger was with a Dr Pepper subsidiary, the plaintiffs argued that in the circumstances, Dr Pepper is or ought to be considered a “constituent corporation” to the merger, and accordingly its stockholders should have appraisal rights. The court disagreed, reasoning that although “constituent corporation” is not defined, Section 251(a) and Section 262(b)(1)(ii) both use the phrase in a manner implying that “constituents” refers to entities “that actually were merged … and not a parent of such entities.” The court also noted that prior decisions have observed that, in triangular mergers, the stockholders of a parent corporation do not vote or have appraisal rights. Leading Delaware corporate law treatises reflect a similar understanding. By contrast, the stockholder-plaintiffs argued the “company whose business is being merged” or “the real party in interest to the merger” should be considered a constituent corporation. The plaintiffs offered “no textual basis” for their contention, however. The court also noted the difficult issues that would follow from endorsing the plaintiffs’ view, including whether dissenting stockholders would be permitted to retain their shares or accept the special dividend.
In this regard, the court also reasoned the fact that Dr Pepper stockholders would continue to own their shares after the transaction supported that appraisal rights are not available. Because Dr Pepper is a public company, Section 262(b)(1)’s “market out” exception applies, and its stockholders do not have appraisal rights unless an exception to the exception exists under Section 262(b)(2). As mentioned above, that provision provides that appraisal rights remain available where the holders of shares of a constituent corporation are required “to accept for such stock anything except” certain types of consideration enumerated in the statute. Here, Dr Pepper stockholders were not required to accept anything for their shares, which they would continue to own after the transaction. The court emphasized that “stockholders are entitled to appraisal of their shares when those shares are being taken from them in certain, statutorily specified types of transactions.”
In response to arguments that stockholders may be harmed by a ruling incentivizing acquirers to structure change of control transactions in this manner—potentially leaving stockholders with only a nominal stake in the post-transaction entity—the court reasoned that plaintiffs were asking it to look past the terms of the statute “to surmise the underlying economic and practical effect of the proposed transaction[.]” The court concluded “it would be inappropriate … to judicially rewrite the statute to achieve this result” and that, if Delaware’s General Assembly is concerned with this form of transaction, the “appropriate recourse” would be “to amend the statute.”
Much has been written about the Delaware Supreme Court’s DFC Global and Dell decisions reversing appraisal awards above the transaction price. As the court here did not agree that the transactions at issue triggered appraisal rights, the Rite Aid and Dr Pepper decisions may seem doctrinally consistent with a trend toward cabining appraisal. More to the point, Rite Aid and Dr Pepper emphasize fidelity to the language of Delaware’s appraisal statute, which grants appraisal rights only in specific circumstances where both the form of transaction and consideration to dissenting stockholders satisfy set criteria. While the stockholder-plaintiffs argued that appraisal rights “ought” to be available in the circumstances presented, tests that involve a threshold examination of either the potential disparity in value of different consideration offered (as the Rite Aid plaintiff advocated) or the practical and economic significance of a transaction diluting stockholders to achieve a sale of control (as the Dr Pepper plaintiffs advocated) lack textual support and may not provide clear, easy to apply standards. As the court noted, advocates of such policy-based arguments for an expansion of appraisal rights to other transactional paradigms remain free to make the case for change in Delaware’s General Assembly.