It is not uncommon for shareholders, who seek appraisal of their shares pursuant to Section 262 of the Delaware General Code (“DGCL”) in objection to a merger, to also pursue claims of wrongdoing against the directors or officers of the merging corporation (i.e. claims for breach of fiduciary duty, fraud, etc.). This post will address relevant case law on whether such actions can be pursued in one complaint, or if claims for wrongdoing and appraisal must be instituted in separate actions, and then subsequently consolidated.
Relevant Cases and Analysis
In the decision of Cede v. Technicolor, Inc., 542 A.2d 1182 (Del. 1988), the Delaware Supreme Court held that claims for appraisal and corporate wrongdoing must be brought separately, and then subsequently consolidated. In that case, the Court affirmed the Court of Chancery’s denial of Plaintiff’s motion to amend its appraisal action to include claims for wrongdoing, on the grounds that “statutory appraisal is limited to ‘the payment of fair value of the shares . . . by the surviving or resulting corporation” . . . and that a “determination of fair value does not involve an inquiry into claims of wrongdoing in the merger.” Cede, 542 A.2d at 1189. The Delaware Supreme Court went on to state that allowing the plaintiff to amend its complaint to allege fraud claims would “impermissibly broaden the legislative remedy” of an appraisal action.
Further, the Court held in Cede that since usually only a small portion of shareholders will seek appraisal, if such shareholders are allowed to litigate claims of wrongdoing in their appraisal proceedings, shareholders not seeking appraisal remedies would be required to litigate their claims independently, which would create the risk of inconsistent judgments and raise issues of collateral estoppel. Accordingly, Cede makes clear that claims for appraisal and corporate wrongdoing against directors and officers must be asserted independently in separate actions, and then subsequently consolidated.
However, the Delaware Court of Chancery, in its 2000 decision of Nagy v. Bistricer, 770 A.2d 43 (Del. Ch. 2000), distinguished Cede and held that appraisal and fiduciary duty claims can be brought in the same action where there is no distinction of identity between those plaintiffs seeking appraisal and those seeking equitable claims. In Nagy, the plaintiff seeking appraisal and claims for wrongdoing was the only minority shareholder of the company, and the remaining shareholders were the directors who authorized the merger. Therefore, the Court held that there was no risk of inconsistent judgments by trying these claims in the same action.
[Relatedly, see our prior post discussing the decision of In Re Appraisal of the Aristotle Corporation, which holds that a stockholder who asserts an appraisal action will not be able to subsequently bring an action for breach of fiduciary duty against directors for failure to disclose adequate information to determine whether stockholder should seek appraisal in the first instance].
Generally speaking, claims against directors and officers for corporate wrongdoing, and appraisal actions brought pursuant to Section 262 of the DGCL, should be asserted in separate complaints, given the rationale set forth by the Delaware Supreme Court in Cede, and then subsequently consolidated. The lone exception to this rule is where the shareholders seeking claims for corporate wrongdoing and appraisal constitute the entirety of the shareholders who could bring such claims.