Corporate Governance

: The Race to the Bottom

Berger v. Pubco: What does Pubco say about appraisal versus fiduciary remedies (and the difference between ?fair price? and ?fair value?)?

By Faith Stevelman (index)

Despite the comments above, it's clear that Pubco is a finely calibrated decision, even a cautious one in asserting minorities' rights in the face of short form mergers. Put most dimly, on Pubco's facts, what we have is an adjudicated fiduciary (disclosure) breach, where the court has denied the minorities a genuine fiduciary remedy. Whose 'fault' is this? In footnote 21, the Supreme Court decision notes that neither side argued that the recovery should include rescissory damages. Is the footnote Jacobs' way of suggesting that though rescissory damagers were not a possibility here, they might be allowable in other quasi-appraisals where fiduciary breach has been demonstrated?

 

In Glassman, to recall, the court noted that just because earlier Delaware decisions had barred the award of rescissory damages in (statutory) appraisals, this 'should not be read to restrict the elements of fair value that may be considered ...' To be sure, there is a long tradition in equity that breaching fiduciaries cannot keep profits arising from their breach. Put another way, does an adjudicated breach of fiduciary duty -- especially a fairly flagrant disclosure breach as in Pubco -- allow us the 'fraud or illegality' out from the traditional confines of appraisal's "fair value." It's at least arguable that the Supreme Court should have gone further in the minorities' interest – done more than remove the barriers of escrow and opt in. Surely the result upon remand will be telling.

 

Is the fair value ("give them back what we got from them") remedy enough? After Pubco, do controllers (especially ones freed from federal disclosure mandates) still have an incentive to withhold (or misrepresent) material information relevant to minorities' appraisal decisions in short form mergers? Did Pubco disserve shareholders in refusing to find Glassman's appraisal prescription inapplicable in the presence of the adjudicated disclosure breach -- i.e. "fraud"?

 

The fiduciary duty of disclosure seems to raise uniquely difficult questions when it comes to monetary remedies. These thorny questions can be bypassed (as shown in Pure Resources, inter alia) where the court can order remedial disclosure, in response to a requested injunction, as precedent to the deal's proceeding thereafter. But this is not viable in short form mergers, where the consummation precedes the disclosures. The disclosures are not relevant to whether the freezeout merger will occur, but only whether the minority will accept the (unilaterally arrived at) deal consideration or seek better through an appraisal. And 'timing is everything:' the ready availability of the deal consideration and salience of the 'done deal' will frame the issue for many minorities – in an escrow/opt- in world, appraisal would look mighty unappealing, as Pubco reflects.

 

To put the question again: after Pubco, do controllers (especially in unlisted firms) have a real incentive to 'complete candor' in their short form mergers? Ironically, the answer would seem to depend on the details of how the court conducts the appraisal, which is not a fiduciary question at all.  

 

In appraisals, the court has tremendous discretion. Faced with expert testimony by both sides, the court is not obliged to accept either one or the other version of the shares' worth; rather, the court is required to arrive at its own conclusion. The subjectivity in valuation exercises would seem to allow the judges considerable discretion to give minorities the benefit of the doubt, financially speaking, where controllers have behaved badly – enough to make controllers leery of asking for trouble via the FDD.

 

Certainly, there's evidence that cashed-out shareholders can do well in Delaware appraisals. (As Emerging Communications and Montgomery Cellular make clear, Jacobs is a master in this area.) In any case, minorities eliminated via §253 have a greater ability to achieve fairness via quasi appraisals after Pubco, even in situations where, formally speaking, fiduciary remedies and rescissory damages have been taken off the table. 

Full post as published by The Race to the Bottom on August 07, 2009 (boomark / email).