In a case of first impression, the Delaware Chancery Court recently held in Roam-Tel Partners v. AT&T Mobility Wireless Operations Holdings, Inc., that a minority stockholder in a short form merger is entitled to participate in an appraisal action notwithstanding the fact it previously waived that right, if the waiver is revoked prior to the end of the appraisal notice period and without the stockholder “exercis[ing] dominion over the merger consideration.”
In Roam-Tel, AT&T Mobility implemented a short form merger with its subsidiary St. Cloud. As required by Delaware law, AT&T sent a notice to minority stockholders summarizing the transaction and informing them of their right to seek appraisal within 20 days of the notice. For those minority stockholders who decided not to seek appraisal, the attached letter of transmittal could be completed and returned with the stock certificates in exchange for the merger consideration. ARAP Partners contacted AT&T to request information on other minority stockholders and the minority stockholder representative on the board of directors. AT&T denied this request. ARAP then completed the letter of transmittal to exchange its shares for the merger consideration because it believed “it had no alternative.” Prior to the end of the 20-day notice period, the minority stockholder’s representative on the St. Cloud board of directors informed ARAP that a group of stockholders planned to file an appraisal action. ARAP then mailed a letter to AT&T two days before the deadline for making an appraisal demand and two days later sent back the uncashed check for the merger consideration. AT&T replied by letter that ARAP’s election to receive the merger consideration instead of appraisal rights was final and could not be rescinded. Roam-Tel later initiated an appraisal action on behalf of St. Cloud minority stockholders and filed a motion to determine the appraisal class, urging the inclusion of ARAP.
The court noted the issue presents “a novel question. Section 262(d)(2) of the DGCL requires that in a short form merger, any minority stockholder who desires appraisal must submit a written demand to the surviving corporation within 20 days after the mailing of a statutorily required notice. The statute does not, however, indicate whether a stockholder may change her mind during that 20 day period.”
ARAP argued that Section262(d)(2) gives a minority stockholder 20 days from the mailing of the notice to make a written demand for appraisal and thereby perfect its appraisal right. Similar to a granting a written consent or a proxy, the initial decision to accept the merger consideration was freely revocable by ARAP. Furthermore, ARAP never accepted the merger consideration because it never cashed the check.
AT&T had three primary arguments against allowing ARAP to rescind the letter of transmittal and join the appraisal action: (1) the letter of transmittal constitutes a binding and enforceable contract; (2) at the time ARAP made a demand for appraisal it was not a stockholder because it had already surrendered its stock; and (3) the surrender of shares, execution of the letter of transmittal and acceptance of merger consideration constituted a waiver of appraisal rights. The court rejected each of these arguments.
First, the court explained that a contract requires an offer, acceptance and consideration. AT&T was statutorily required to give notice of and the opportunity for appraisal to minority stockholders and the “promise to do what one is legally obligated to do . . . is not valid consideration.” Therefore, there was no contract because there was no consideration.
Second, the court addressed the argument that ARAP needed to possess the stock certificates in order to perfect appraisal rights. The court reasoned that "the only way to make sense of the statute – the statute that expressly provides appraisal rights to minority stockholders in the wake of a short form merger – is to read the term 'stockholder' in a case like this one where the effect of the short form merger was to cancel immediately the shares of the minority investors, as excluding those stockholders of record who held shares immediately before the effective date of the short form merger.” Thus, since the effectiveness of the merger automatically canceled the stock, ARAP’s continued possession of the stock certificates was not relevant.
Third, the court addressed AT&T’s argument that ARAP irrevocably waived its appraisal rights when it returned the executed letter of transmittal. The court stated that “this argument depends on using confusing equitable doctrines in an inequitable way.” The court discussed the differences between waiver and estoppel at length, ultimately concluding that a waiver can be retracted before the other party has materially changed his position in reliance on the waiver. The court noted “[a]t most, in the case of the stockholder who changes his mind, the corporation — a non-human — may suffer  the disappointment of seeing an appraisal class grow, having believed that it faced no risk because that stockholder had earlier indicated a desire to forgo an appraisal. That psychic injury does not amount to the sort of reliance that would justify denying a stockholder the chance to change its mind within the 20 day statutory election period.”
The court concluded by agreeing with ARAP that a minority stockholder’s decision to execute a letter of transmittal is analogous to allowing a stockholder in a long form merger to change its “yes” proxy vote or consent to a “no” prior to the final vote. In both long form and short form mergers, stockholders are given a period of time to determine whether to accept the merger consideration. However, unlike stockholders in a long form merger, minority stockholders in a short form merger have less time to determine whether to accept the merger consideration and less information related to the merger. Given the obstacles already facing minority stockholders in a short form merger, “[i]n the absence of prejudice to the corporation, these factors counsel against truncating an already brief 20 day election period and counsel in favor of allowing stockholders the full 20 days to make a final decision whether to seek appraisal.“
In sum, the court concluded “a stockholder who waives its right to an appraisal and is sent the merger consideration may rescind that waiver and perfect its right to an appraisal if: i) the demand is made within the statutory election period; and ii) the minority stockholder does not actually accept the merger consideration in the sense of exercising dominion over the funds.”