In Kahn v. Stern, an opinion issued by the Delaware Court of Chancery mid last year, the Court dismissed a breach of fiduciary duty claim seeking, among other remedies, quasi-appraisal damages. The case arose out of the sale of Kreisler Manufacturing Corporation (“Kreisler”), a small, thinly-traded (listed only on the pink sheets), public aerospace manufacturing company, to Arlington Capital Partners (“Arlington”). The merger was approved by written consent of a majority of Kreisler’s outstanding shares, without a stockholder vote, and was announced on May 31, 2016. That same day, Kreisler distributed an information statement to its shareholders to inform them of the deal and allow them to decide whether to exercise their appraisal rights—the deadline for seeking appraisal was June 20, 2016. Notably, the merger agreement contained an “appraisal out” provision that permitted Arlington to back out of the merger if more than 10% of Kreisler’s outstanding shares sought appraisal (see our prior posts discussing such provisions here, here, and here). The plaintiff, however, did not seek to enjoin the merger pre-close or exercise his appraisal rights by the appraisal cutoff. Instead, the plaintiff filed a complaint for breach of fiduciary duty against the Kreisler board days after the appraisal deadline had passed.
The complaint, among other things, alleged that the Kreisler board breached its fiduciary duties by: (1) approving the transaction in light of certain “side deals” that were negotiated by two inside directors in connection with the merger, and (2) making misstatements and omissions in the information statement provided to Kreisler’s shareholders. With regard to the disclosure claims, the plaintiff alleged that the defendants knowingly withheld or misrepresented material information in the information statement to reduce the likelihood that Kreisler’s shareholders would prevent the merger by asserting appraisal rights, and in so doing, the defendants deprived Kreisler’s shareholders of their ability to make a fully informed decision regarding their appraisal rights. In light of the injury caused by these alleged disclosure deficiencies, the plaintiff sought quasi-appraisal damages.
In deciding the disclosure claims, the Court noted that if the plaintiff had sought injunctive relief before the merger closed, such relief may have been warranted. The Court explained that, in the pre-close, injunctive relief context, the Court would have applied enhanced scrutiny and looked to whether the information statement withheld or misstated information material to the stockholders’ decision to approve the deal or seek appraisal. In the post-closing, damages context, on the other hand, the Court explained that the plaintiff must have alleged facts making it reasonably conceivable that the director defendants, who were found to be independent and disinterested and were protected by an exculpatory charter provision, acted in bad faith in issuing the disclosures. The Court found that nothing in the record, even in light of the side deals and appraisal-out provision, created an inference that the alleged disclosure deficiencies were made in bad faith. Thus, the Court dismissed the disclosure claims, which included the plaintiff’s request for quasi-appraisal damages.
For additional insight on the Court’s views on the quasi-appraisal remedy, see our prior post here.
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