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 started its analysis by noting that the common stock of Wesco fell within the “market-out” exception set forth in Section 262(b)(1) because Wesco was listed on a national securities exchange. The court then turned to the “exception to the exception” provision of the appraisal statute, Section 262(b)(2), which restores appraisal rights to stock otherwise covered by the market-out exception if holders are “required by the terms of an agreement of merger or consolidation” to accept certain types of consideration excluding, among other categories, shares of stock listed on a national securities exchange, cash in lieu of fractional shares, and any combination of shares of stock and cash in lieu of fractional shares.

Because under the terms of the merger agreement, holders of Wesco common stock were not “‘required’ to accept appraisal-triggering consideration” (emphasis added) and could elect to receive Berkshire Class B common stock, the court held they were not entitled to a Section 262 appraisal.

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.

The court found there to be nothing coercive about the election scheme despite the following language contained in Wesco’s proxy statement: “[Wesco] reserves the right to take the position that appraisal … may not be exercised with respect to any shares as to which cash was elected or stock was received.”

Noting that a misleading disclosure can warrant a quasi-appraisal remedy (i.e., a fiduciary remedy beyond a mere “fair value” award) of the type established by the Delaware Supreme Court in 2009 in Berger v. Pubco, the court called the Wesco proxy “erroneous” but not actionable due to the fact that Wesco’s common stockholders were not entitled to appraisal rights and, thus, the erroneous disclosure neither misled nor harmed them.

Finally, the court rejected plaintiff’s argument that appraisal rights should be available because the proxy statement “equivocated” with respect to the issue. The court’s view was that all the proxy statement did was explain Wesco’s position with respect to an unsettled question of law that was balanced against plaintiff’s contrary view of the law after litigation was initiated. Therefore, because the proxy statement disclosed both plaintiffs’ and defendants’ views on the availability of appraisal rights, the proxy was “accurate and complete.” 

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