Litigation: Optional merger consideration results in denial of appraisal rights

Examining the effects of Krieger v. Wesco Financial Corp.

In an opinion issued on Oct. 13, 2011, in Krieger v. Wesco Financial Corp., the Delaware Court of Chancery ruled that holders of a target company’s common stock were not entitled to appraisal rights under Section 262 of the Delaware General Corporation Law because they were not “required” pursuant to the terms of the merger agreement to accept a form of merger consideration for which appraisal rights are available under Section 262.

In February 2011, Wesco Financial Corp. (Wesco), a publicly traded corporation, engaged in a forward triangular merger with its parent company, Berkshire Hathaway Inc. (Berkshire), and Montana Acquisitions LLC, a Berkshire subsidiary. Under the terms of the merger agreement, the minority stockholders of Wesco could elect to have their shares converted into the right to receive: (i) $385 per share in cash, (ii) an equivalent value in publicly traded shares of Berkshire Class B common stock, or (iii) a combination of cash and publicly traded shares. The merger agreement expressly stated that stockholders who failed to make an election would receive cash.

The court also rejected arguments based on actual elections made by certain individual Wesco stockholders and stated that: “The General Corporation Law in fact makes appraisal rights available on a transactional and class-wide (or series-wide) basis. Stockholders can choose individually whether to perfect or pursue their appraisal rights, but the underlying statutory availability of appraisal rights is not a function of individual choice.”

The plaintiff also argued that Wesco stockholders who wanted to vote against the merger had no choice but to elect cash because the election deadline preceded the special meeting called by Wesco. The court rejected that argument as well because the merger agreement did not condition a stockholder’s ability to elect one form of consideration over another on whether such stockholder voted for or against the merger.


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John Reed

John Reed is a partner the Delaware office of DLA Piper, where he concentrates his practice on corporate litigation and counseling. He can be contacted...

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