In this opinion, the Court of Chancery granted defendants’ cross-motion for partial summary judgment, finding that the holders of Wesco Financial Corp. (“Wesco”) common stock were not entitled to appraisal rights because they were not required pursuant to the terms of the merger agreement at issue to accept a form of merger consideration triggering appraisal rights under DGCL Section 262.
In February 2011, Wesco, a publicly traded corporation that operates insurance, furniture rental and steel service center businesses, executed a forward triangular merger with its parent company Berkshire Hathaway Inc. (“Berkshire”) and Montana Acquisitions, LLC, a Berkshire subsidiary. Prior to the merger, Berkshire indirectly owned 80.1% of Wesco’s outstanding common stock.
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 specified that stockholders who failed to make an election would receive cash, and the number of stockholders who could elect to receive shares of Berkshire Class B common stock was not capped, subject to proration or otherwise restricted.
In analyzing the parties’ claims, the Court first determined that the common stock of Wesco fell within the “market-out” exception contained in DGCL Section 262(b)(1) by virtue of Wesco’s listing on a national securities exchange. The Court then discussed “exception to the exception” language contained in DGCL 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.
Noting that under the terms of the merger agreement, holders of Wesco common stock were not “‘required’ to accept appraisal-triggering consideration,” and reaffirming the ability of holders of Wesco common stock to elect to receive Berkshire Class B common stock if they so chose, the Court criticized plaintiff’s focus on certain elections made by individual Wesco stockholders, stating 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 Court also dismissed plaintiff’s argument that Wesco stockholders who wanted to vote against the merger had no choice but to elect cash consideration since the election deadline preceded the special meeting called by Wesco, explaining that 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 was likewise skeptical of plaintiff’s contention that Wesco’s stockholders were “coerced” into failing to make an election with respect to the form of merger consideration in light of language contained in Wesco’s proxy statement indicating that 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.” Characterizing the proxy disclosure as “erroneous,” and noting that a misleading disclosure may, under certain circumstances, trigger the quasi–appraisal remedy analyzed in Berger v. Pubco, 976 A.2d 132 (Del. 2009), the Court nonetheless found that since holders of Wesco common stock were not entitled to appraisal rights, the flawed proxy disclosure neither misled nor harmed Wesco’s stockholders.
Turning to plaintiff’s argument that the proxy statement “equivocated” with respect to the availability of appraisal rights, the Court held that the proxy statement appropriately disclosed Wesco’s view with respect to an unsettled question of law, as well as plaintiff’s contrary view of the law once litigation proceedings commenced. The Court concluded that disclosures contained in the proxy statement with respect to plaintiff’s and defendants’ view of the availability of appraisal rights were therefore “accurate and complete.”
The full opinion is available here.