In Re United Capital Corp., Stockholders Litigation

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
IN RE UNITED CAPITAL CORP., ) CONSOLIDATED
STOCKHOLDERS LITIGATION ) C.A. No. 11619-VCMR
MEMORANDUM OPINION
Date Submitted: October 5, 2016
Date Decided: January 4, 2017
Seth D. Rigrodsky, Brian D. Long, Gina M. Serra, and Jeremy J. Riley,
RIGRODSKY & LONG, P.A., Wilmington, Delaware; Donald J. Enright and
Elizabeth K. Tripodi, LEVI & KORSINSKY LLP, Washington, D.C.; Attorneys for
Plaintiff.
Bruce L. Silverstein and James M. Yoch, Jr., YOUNG CONAWAY STARGATT &
TAYLOR LLP, Wilmington, Delaware; Attorneys for Defendants.
MONTGOMERY-REEVES, Vice Chancellor.
The plaintiff in this action seeks a quasi-appraisal to remedy purported
breaches of the duty of disclosure in connection with a short-form merger. The
plaintiff alleges the pertinent notice of merger does not properly disclose the
controller’s reasoning behind the merger price, the special committee’s process,
financial projections used to determine the value of the company, information
regarding the working capital and future use of cash of the company, the lack of
independence of two members of the special committee, and the identities of two
directors and a director’s spouse who participated in a multi-million dollar note with
the company.
Defendants move to dismiss the complaint on the grounds that all material
information is disclosed in the notice and, in the realm of a short-form merger, any
omitted information is not material to the decision at hand—whether the minority
stockholders should accept the merger consideration or seek appraisal. This
memorandum opinion grants the motion to dismiss because the plaintiff does not
allege adequately that the omitted information is material to the decision to seek
appraisal and the duty of disclosure was not violated. Therefore, the only remedy
available to the minority stockholders is appraisal.
1
I. BACKGROUND
The facts are drawn from the Verified Class Action Complaint (the
“Complaint”) and the documents incorporated by reference therein.
A. Parties
Lead Plaintiff Louis B. Geser (“Plaintiff”) owned shares of common stock in
United Capital Corporation (“United Capital” or the “Company”). Defendant
United Capital is a Delaware corporation with offices in Great Neck, New York.
United Capital invests in and manages real estate and manufactures engineered
products. United Capital has not been required to file any periodic reports with the
United States Securities and Exchange Commission (“SEC”) since 2011, nor has it
provided informal public disclosures about operations or financial results since
December 21, 2013.
Defendant A.F. Petrocelli is Chairman of the Board, President, and Chief
Executive Officer of United Capital. Petrocelli owned approximately 94% of the
outstanding shares of United Capital before the transaction at issue. Petrocelli also
is a lead independent director of Nathan’s Famous, Inc. (“Nathan’s”), a director of
Philips International Realty (“Philips”), and a board member of Prime Hospitality
Group (“Prime”).
Defendant Howard Lorber is a director of United Capital, Prime, and
Nathan’s. Lorber also partially owns Hallman & Lorber Associates, Inc. (“H&L”),
2
which provided pension plan services to United Capital during the 2010 fiscal year
for $20,000. H&L may have an ongoing relationship with United Capital.
Defendant Arnold Penner is a director of United Capital and Philips.
Defendant Anthony J. Miceli is a director, Vice President, and Chief Financial
Officer of United Capital. Defendants Michael T. Lamoretti and Michael J.
Weinbaum are directors and Vice Presidents in real estate operations for the
Company. Defendant Robert Mann is a director of United Capital. (Petrocelli,
Lorber, Penner, Miceli, Lamoretti, Weinbaum, and Mann, collectively, the “Board”;
the Board and United Capital, collectively, “Defendants”).
B. Facts
On June 22, 2015, Petrocelli submitted an initial bid letter to the Board
offering to purchase the minority shares of the Company for $30 per share. On June
23, 2015, and July 27, 2015, the Board resolved to form a special committee
consisting of Lorber, Mann, and Penner (the “Special Committee”). The Special
Committee had the power to:
act independently including: (i) the ability to engage
independent legal, financial and other advisors at the
Company’s expense; (ii) direct access to management and
the Company’s regular outside counsel and other advisors;
and (iii) the power to reject the proposed transaction and
3
to exercise arm’s length bargaining power with Mr.
Petrocelli.1
On August 5, 2015, the Special Committee met and decided not to retain
advisors, other than legal counsel, to assist in its evaluation. On August 12, 2015,
the Special Committee met and reviewed “financial and other information provided
by the Company,” concluded that the initial bid amount was insufficient, and
countered Petrocelli at $35 per share.2 Petrocelli then offered $31 per share. On
August 18, 2015, the Special Committee met and proposed a $33 counteroffer to
Petrocelli. Petrocelli responded with a “final and best offer of $32 per share.” 3 On
August 19, 2015, the Special Committee approved the proposed merger and
determined that “it was fair and in the best interests of the Company and its
stockholders.”4
On August 24, 2015, United Capital entered into an Agreement and Plan of
Merger (the “Merger Agreement”) with A.F. Petrocelli LLC, a Delaware limited
liability company, (“Parent”) and A.F. Petrocelli Acquisition Co., a Delaware
corporation and wholly-owned subsidiary of Parent (“Merger Sub”). Petrocelli
1
Compl. ¶ 29.
2
Id. ¶ 31.
3
Id. ¶ 33.
4
Id.
4
transferred his 94% stock interests in United Capital to Merger Sub. On the date the
merger was announced, United Capital stock was trading at $39 per share.
On September 3, 2015, Plaintiff received written notice of the merger from
United Capital (the “Notice”), which includes, among other things, financial
statements for 2013, 2014, and 2015, management’s analysis of the Company’s
financial status, the background of the merger, and potential Board and Special
Committee conflicts. The merger was effective on September 30, 2015, with United
Capital as the surviving entity. Petrocelli became the sole stockholder of United
Capital.
C. Procedural History
On October 16, 2015, Geser filed the Complaint on behalf of the public
minority stockholders of United Capital. On October 28, 2015, Solomon Margolis
filed a class action complaint arising out of the same transaction. On December 8,
2015, Geser moved to consolidate both actions and sought appointment of himself
as lead plaintiff, Levi & Korsinsky LLP as lead counsel, and Rigrodsky & Long,
P.A. as liaison counsel. On December 9, 2015, Margolis moved to consolidate both
actions and sought appointment of himself as lead plaintiff, Pomerantz LLP as lead
counsel, and Montgomery McCracken Walker & Rhoads LLP as liaison counsel.
On February 9, 2016, I appointed Geser as lead plaintiff and his counsel as lead and
liaison counsel, and designated his complaint as the operative complaint. Thereafter,
5
the parties briefed Defendants’ motion to dismiss the Complaint (“Motion to
Dismiss”), and on October 5, 2016, I held oral argument.
II. ANALYSIS
A. Standard of Review
In considering a motion to dismiss under Rule 12(b)(6), the Court must
“accept all well-pleaded factual allegations in the Complaint as true, accept even
vague allegations in the Complaint as ‘well-pleaded’ if they provide the defendant
notice of the claim, [and] draw all reasonable inferences in favor of the plaintiff.”5
The Court may only grant the motion if plaintiff cannot recover under “any
reasonably conceivable set of circumstances susceptible of proof.”6
When a transaction occurs under 8 Del. C. § 253, “the parent corporation does
not have to establish entire fairness.”7 Instead, “absent fraud or illegality, the only
recourse for a minority stockholder who is dissatisfied with the merger consideration
is appraisal.”8 “Although fiduciaries are not required to establish entire fairness in
a short-form merger, the duty of full disclosure remains, in the context of this request
5
Cent. Mortg. Co. v. Morgan Stanley Mortg. Capital Hldgs. LLC, 27 A.3d 531, 536
(Del. 2011) (footnote omitted).
6
Id.7
Glassman v. Unocal Expl. Corp., 777 A.2d 242, 243 (Del. 2001).
8
Id.6
for stockholder action.”9 Specifically, the company must notify the minority of the
availability of appraisal rights and include a correct copy of the appraisal statute.10
Additionally, disclosure of the “information material to the decision of whether or
not to seek appraisal is required”; however, “[t]he parent need not provide all the
information necessary for the stockholder to reach an independent determination of
fair value.”11 Information is material if there is “a substantial likelihood that the
undisclosed information would significantly alter the total mix of information
already provided.”12 “[O]mitted facts are not material simply because they might be
helpful.”13 A “disclosure violation results in an irreparable injury,” which may be
remedied through “quasi-appraisal.”14
9
Id. at 248.
10
8 Del. C. § 262(d)(2).
11
In re Unocal Expl. Corp., 793 A.2d 329, 352 (Del. Ch. 2000), aff’d, Glassman, 777
A.2d 242.
12
Berger v. Pubco Corp., 2008 WL 2224107, at *3 (Del. Ch. May 30, 2008) (quoting
Skeen v. Jo-Ann Stores, Inc., 750 A.2d 1170, 1174 (Del. 2000)), rev’d on other
grounds, 976 A.2d 132 (Del. 2009).
13
Id.14
Id. at *4.
7
B. The Notice Contains the Requisite Information for Stockholders to
Decide Whether to Seek Appraisal
The eighty-page Notice in this case provides comprehensive information
regarding the business and financials of the Company. The Notice contains an in-
depth discussion of the three business segments: real estate investments, hotel
operations, and engineered products. The Notice details (1) the types of real estate
investments owned and managed by United Capital and the net lease arrangements
of these properties, (2) the hotels’ sizes, locations, and management structures, and
(3) the types of products, lines of distribution, brands, and industry markets for the
engineered products.15 The Notice includes a three-page single-spaced summary of
the background of the merger and how the merger price was established, including
a discussion of the Special Committee’s and Board’s processes for considering and
approving the merger.16 The Notice also provides (1) historical stock purchases
since 2012, (2) audited, consolidated financial statements for years 2013 and 2014,
(3) unaudited, consolidated financial statements for the six-month period ending in
June 2015, (4) notes to the financial statements which detail United Capital’s
operations, income, and overall financials, (5) seven single-spaced pages of
management’s analysis of the business’s financial results for the year 2014 and the
15
Notice 2-3.
16
Id. at 5-7.
8
six months ended on June 30, 2015, and (6) disclosure of possible Board and Special
Committee conflicts.17
In fact, relying primarily on the Notice, Plaintiff determines that the merger
consideration is inadequate. Plaintiff uses the financial statements attached to the
Notice to decide that the merger price’s $186.6 million implied total equity value
significantly undervalues the Company due to the $98 million in cash on hand in
June 2015 (worth nearly $17 per share), the total assets of $342.4 million (nearly
twice the implied equity value), and the improvement of the Company between 2013
and 2014 (total assets increased by over $50 million, total revenues increased from
$119.1 million to $128.3 million, and net income increased from $12.5 million to
$13.3 million).18 Thus, Plaintiff’s allegations suggest that the Notice’s financial
disclosures give Plaintiff the minimum information necessary to determine whether
he could “trust that the price offered is good enough,” or whether the price
undervalued the Company “so significantly that appraisal is a worthwhile
endeavor.”19
17
See id. at 2-7, 11, Ex. B, Ex. C.
18
Compl. ¶¶ 40-44.
19
Berger, 2008 WL 2224107, at *3.
9
Nevertheless, Plaintiff identifies numerous omitted facts he deems material.
Specifically, he points to the exclusion of (1) the information used by the Special
Committee to set the $32 per share merger price, (2) Petrocelli’s rationale for his
original offer, (3) specific financial information, including projections, (4) the extent
to which cash and cash equivalents were working capital, (5) potential conflicts of
two of the three purportedly independent members of the Special Committee, and
(6) the identities of certain directors and a director’s spouse who jointly owned an
$8 million note with the Company. But, none of Plaintiff’s alleged omissions are
material to the decision of whether to seek appraisal in light of the abundant
disclosures already provided.
1. The Notice discloses the necessary information regarding the
Special Committee’s determination of a fair price
Plaintiff argues the Notice should have discussed the specific “financial and
other information” the Special Committee used in its deliberations to determine that
the $32 per share price was fair, especially given the absence of a fairness opinion
or independent outside valuation and the disparity between the stock’s most recent
$39 per share public trading price, the $40 per share high in the year before the
merger, and the $32 merger price.20
20
Pl.’s Answering Br. 14-16.
10
Here, the Notice discloses comprehensive information regarding the Special
Committee, the negotiating process, and the Board’s consideration of numerous
factors in determining that the merger price was fair.21 United Capital discloses that
the Board set up a Special Committee with full power to act independently, and the
Special Committee hired counsel and reviewed Petrocelli’s offer. 22 The Notice
discloses that the Special Committee “analyzed whether to retain financial or other
advisors to assist the Special Committee in its evaluation and concluded such
advisors were not necessary.”23 The Special Committee then obtained “financial and
other information” from the Company.24 The Notice details the various meetings of
the Special Committee and the Special Committee’s consideration of:
the benefits of the proposed merger to the Company and
the minority stockholders, including that, (i) there is
limited public information about the Company available
to stockholders and (ii) the Common Stock was thinly
traded and illiquid. The Special Committee determined
that allowing minority stockholders to realize fair value of
their stock through the short form merger process would
be in the best interests of the minority stockholders.25
21
Notice 5-7.
22
Id. at 5.
23
Id. at 6.
24
Id.
25
Id.
11
The Notice describes that in connection with these meetings, the Special Committee
evaluated Petrocelli’s offers and proposed changes to both the price and substantive
terms of the merger agreement.26 In addition to the detailed disclosure of the back
and forth between the Special Committee and Petrocelli, the Notice also includes
robust financial statements to allow stockholders to make their decision about
whether or not to seek appraisal.27
These disclosures are sufficient.28 The Notice gives a sense of whether the
number was arbitrarily “picked out of a hat” or was based on some concrete
evidence, and divulges that a negotiating committee was set up, but that it did not
rely on outside experts.29 Plaintiff fails to convince me that disclosure of the
Committee’s explicit use of certain financial information would substantially alter
the “total mix” of information available to the stockholders.
2. The Notice adequately discloses Petrocelli’s reasoning
behind his offer price
Plaintiff claims the Notice fails to give Petrocelli’s rationale for how he set
the merger price, and that such information is material to determining whether or not
26
Id. at 6-7.
27
Id. at 6-7, Ex. B.
28
Berger v. Pubco Corp., 2008 WL 2224107, at *3 (Del. Ch. May 30, 2008).
29
See id.12
to trust the price offered. Plaintiff cites to Berger v. Pubco Corp. as proof that
omission of the method by which the controller sets the merger consideration is
material.30 In Berger, however, the notice contained almost no detail. There was no
description of the company’s actual operations, no breakdown of the company’s
finances by division or line of business, no discussion of cash utilization, no
discussion of plans or prospects, and no discussion of how the controller determined
the price.31 The Notice contained a “scant five sentences” describing the company
at issue, with one sentence merely stating “the [c]ompany owns other income
generating assets.”32 The Court held that in a context where an unregistered
company’s “[n]otice was relatively terse and short on details, the method by which
[the controller] set the merger consideration is a fact that is substantially likely to
alter the total mix of information available to the minority stockholders.”33
The Notice here discloses Petrocelli’s rationale and includes relevant financial
data to allow stockholders to determine whether the price “was set by arbitrarily
rolling the dice.”34 It states that Petrocelli’s rationale for his original offer was that
30
Pl.’s Answering Br. 17 (citing Berger, 2008 WL 2224107, at *3).
31
Berger, 2008 WL 2224107, at *1.
32
Id.33
Id. at *3.
34
Id.; Notice 2-7, Ex. B.
13
“with uncertainty in the real estate, hotel and automotive industries and the state of
the economy, a short-form merger provides certainty and liquidity to minority
stockholders.”35 It gives the prices of stock buybacks from the Petrocelli family, the
Company, and the open market in the three years before the merger—presumably
information Petrocelli used to determine his offer price.36 The Notice also discloses
Petrocelli’s extensive negotiations with the Special Committee.37 Further, the
Notice discusses the various segments of United Capital’s business at length and
provides significant historical, current, and forward-looking financial data.38 And,
the Notice explicitly states that no fairness opinion, report, or appraisal from an
outside party was used to determine the value of the stock.39 The Company did not
need to provide “picayune details about the process [Petrocelli] used to set the
35
Notice 5.
36
Id. at 4 (stating that since the beginning of 2012, United Capital has purchased
1,506,769 shares of Company common stock (of which 1,477,200 were from family
members of Petrocelli) at a price of $30 per share, 2,494 shares of Company
common stock at a price of $31 per share, and 89,000 shares of common stock on
the open market, with the highest price being $29.87 per share).
37
Id. at 5-7 (discussing the negotiation process, the details of Petrocelli’s original
offer, the Special Committee’s counteroffer, Petrocelli’s second offer, the Special
Committee’s second counteroffer, and Petrocelli’s third and final offer, which the
Special Committee ultimately accepts).
38
Id. at 4, Ex. B; see also infra Section II.B.3.
39
Notice 4.
14
price.”40 Instead, the Company should have and did disclose “in a broad sense what
that process was, assuming [Petrocelli] followed a process at all and did not simply
choose a number randomly.”41 Given the information disclosed regarding the entire
negotiation process, as well as the Company’s business and finances, Plaintiff fails
to convince me that understanding exactly how Petrocelli came up with his initial
offer price would significantly alter the “total mix” of information available under
these circumstances.
3. The Notice provides sufficient financial data
Plaintiff argues that the Notice fails to disclose any financial projections, and
any purportedly forward-looking information does not provide an accurate view of
the Company’s future, rendering the Notice materially deficient.42 Plaintiff further
contends that the existence of the forward-looking information allows for the
inference that financial projections did exist and were given to the Special
Committee, but were withheld from the minority stockholders.43
40
Berger v. Pubco Corp., 2008 WL 2224107, at *3 (Del. Ch. May 30, 2008).
41
Id. (emphasis added)
42
Pl.’s Answering Br. 19-20.
43
Id.15
Plaintiff points to the Court’s decision in Erickson v. Centennial Beauregard
Cellular, L.L.C. for the proposition that financial projections are material in the
context of a short-form merger.44 In Erickson, a case also involving a non-public
company, the only financial information provided to the stockholders was a one-
and-a-half-page valuation based upon a single calculation of EBITDA over an
unidentified period of time.45 While the Court stated that even in the short-form
merger context, “some indication of business revenue projections is still necessary,”
the parent in that case had provided “meager information” that “was so devoid of
substantive current and future data that it cannot realistically be said to have
encompassed management’s view of the future of the company.”46
United Capital has provided much more financial information, including
current, historical, and forward-looking information. The current and historical
information includes, among other things, (1) audited, consolidated financial
statements for the years 2013 and 2014, (2) unaudited, consolidated financial
statements for six-month period ending in June 2015, (3) management’s detailed
analysis of the financials for the year 2014 and the six-month period ending in June
44
Id. at 20 (citing Erickson v. Centennial Beauregard Cellular, L.L.C., 2003 WL
1878583 (Del. Ch. Apr. 11, 2003)).
45
Erickson, 2003 WL 1878583, at *6.
46
Id. at *7.
16
2015, and (4) the prices of recent buybacks of shares.47 The forward-looking
financial information includes (1) future minimum rental revenues through the year
2019 and thereafter, (2) future pension benefit payments through the year 2024, (3)
future lease obligations through 2019 and thereafter, and (4) aggregate maturities on
mortgage obligations through the year 2019 and thereafter.48 Plaintiff argues that
the forward-looking information suggests United Capital had access to financial
projections, and Plaintiff infers that these projections were provided to the Special
Committee.49 But, Plaintiff provides no factual support for the assumption that
projections exist, and nothing in the Notice suggests that they exist. “I reiterate this
Court’s consistent position that ‘management cannot disclose projections that do not
exist.’”50 Moreover, unlike in Erickson, where business revenue projections clearly
would have significantly altered the “total mix” of information given, as there was
47
Notice 4, Ex. B, Ex. C; see supra Section II.B.2.
48
Notice Ex. B, at F-12-22.
49
Pl.’s Answering Br. 19-20 (citing Maric Capital Master Fund, Ltd. v. Plato
Learning, Inc., 11 A.3d 1175, 1178 (Del. Ch. 2010); In re Lukens Inc. S’holders
Litig., 757 A.2d 720, 727 (Del. Ch. 1999)).
50
In re BioClinica, Inc. S’holder Litig., 2013 WL 673736, at *5 (Del. Ch. Feb. 25,
2013) (quoting In re CNX Gas Corp. S’holders Litig., 4 A.3d 397, 419 (Del. Ch.
2010)).
17
almost none, here, Plaintiff fails to allege how projections that may or may not exist
would be material, given the breadth of financial data disclosed in the Notice.
4. The Notice appropriately discloses United Capital’s cash,
cash equivalents, and their future use
Plaintiff alleges that Defendants fail to disclose the extent to which United
Capital’s cash (or cash equivalents) was working capital or the Company’s plans for
utilizing the cash in its business plans.51 The Notice, however, does disclose the
extent to which cash is working capital, cash utilization (including various
transactions and expenditures throughout 2013 and 2014), and forward-looking
information.52 Plaintiff fails to explain why any additional information would alter
the “total mix” of information available, instead suggesting such information is
helpful in performing an independent valuation of United Capital. An absent fact’s
mere helpfulness does not make that fact material, and regardless, in a short-form
51
Compl. ¶ 55.
52
Defs.’ Opening Br. 41-44; see Notice Ex. B, at F-6, F-7, F-10, F-11, F-12, F-15, F-
16, F-21, F-22, F-28, F-30, F-33, Ex. C, at 5; see also Berger v. Pubco Corp., 2008
WL 2224107, at *4 (Del Ch. May 30, 2008) (holding that additional disclosures
regarding the company’s future plans with its cash and securities were not material
because the financial disclosures revealed that the cash and securities were worth
more than the merger consideration and allowed plaintiff to determine she did not
trust the parent’s valuation).
18
merger, the minority stockholders are not entitled to all facts material to their own
valuation assessment.53
5. The Notice adequately discusses the independence of Lorber
and Penner
Plaintiff claims the Notice does not disclose that “two of the three purportedly
independent directors on the Special Committee have had long personal,
professional, and financial ties with Petrocelli that call into question their ability to
render their decision in an impartial manner,”54 making the Notice materially
misleading.55 Specifically, Plaintiff alleges the material omissions relate to (1)
Penner’s “twenty year stint” on the board of Philips alongside Petrocelli, (2)
Petrocelli’s “twenty-three year service” on the board of Nathan’s during which time
Lorber held various management positions, and (3) Lorber’s “business ties and
financial interests” through H&L’s “business dealings with Petrocelli.”56
53
Berger, 2008 WL 2224107, at *3; In re Unocal Expl. Corp., 793 A.2d 329, 352
(Del. Ch. 2000). Plaintiff relies on In re Radiology Associates, Inc. Litigation for
the proposition that the disclosure of future use of cash is material because this is
information “which will allow a shareholder to determine if he is receiving a fair
price.” Pl.’s Answering Br. 27 (quoting In re Radiology Assocs., Inc. Litig., 1990
WL 67849, at *11 (Del. Ch. May 16, 1990)). In Radiology, however, the Court
made no determination as to whether information regarding the working capital of
the company or the future plans for the cash and cash equivalents was material.
54
Compl. ¶ 54.
55
Pl.’s Answering Br. 23.
56
Id. at 24.
19
In In re Unocal Exploration Corp. Shareholders Litigation, the Court held
that “the committee’s efforts should not be used as a basis for undermining the
adequacy of the appraisal remedy,”57 even where the special committee had divided
loyalties to UXC and Unocal (UXC’s 96% controlling stockholder), and the Court
could not conclude that the committee “engaged in genuine, arm’s-length
negotiations.”58 Because the company disclosed the special committee’s existence,
each member’s position as a dual director of Unocal and UXC, and a brief outline
of the committee’s efforts, the stockholders were given all of the information they
needed to reach their decision about whether to seek appraisal.59 Further, “Unocal
did not encourage stockholders to rely centrally on the efforts of the Special
Committee”; therefore, the stockholders “were not deceived into relying on the
Special Committee to protect their interests.”60 The Notice, like the disclosures in
Unocal Exploration, reveals the Special Committee’s existence, outlines its
negotiation process, discloses Lorber’s and Penner’s potential conflicts, provides
57
793 A.2d 329, 349 (Del. Ch. 2000) (“If Unocal, before acting unilaterally,
conducted the minority-focused analysis performed by the Committee, plaintiffs
clearly would fail to show fraud or illegality. That the Committee conducted the
analysis in Unocal’s stead does not change the result.”).
58
Id. at 348 (quoting Weinberger v. UOP, Inc., 457 A.2d 701, 710 (Del. 1983)).
59
Id. at 355.
60
Id.; but cf. infra note 66.
20
financial and business information necessary to inform stockholders about whether
to seek appraisal, and does not deceive stockholders into relying primarily on the
Special Committee.61
Plaintiff attempts to distinguish this case from Unocal Exploration on the
basis that the Unocal Exploration stockholders had the benefit of a financial advisor
and a public, reporting company; thus, the stockholders had “all of the information
they reasonably needed to reach their own conclusion about the utility of seeking
appraisal.”62 Plaintiff contends that in the present case, “stockholders were
considering the value of a thinly-traded, unlisted, non-reporting company,” did not
have the benefit of a financial advisor’s valuation, and were forced to decide whether
to seek appraisal based on “limited and incomplete public information.”63 But, the
Notice does not mislead Plaintiff into believing the Special Committee relied on an
outside valuation and explicitly states that no financial advisor was used.64
61
See infra Section II.B.6; Notice 4-7, Ex. B.
62
Pl.’s Answering Br. 25-26.
63
Id. at 26.
64
Notice 4. In a short-form merger, there is no duty to provide a fairness opinion. See
Glassman v. Unocal Expl. Corp., 777 A.2d 242, 247-48 (Del. 2001) (“If, instead,
the corporate fiduciary sets up negotiating committees, hires independent financial
and legal experts, etc., then it will have lost the very benefit provided by the
statute—a simple, fast and inexpensive process for accomplishing a merger.”).
21
Additionally, Plaintiff admits that there is enough public information to “indicate
that the consideration may be inadequate,”65 and Plaintiff uses this information to
determine he cannot trust the merger price. Thus, stockholders have all the
information necessary to decide whether to seek appraisal.66
6. The Notice sufficiently discloses certain directors’ potential
conflicts
Plaintiff alleges that the Notice fails to disclose the identity of the directors
and the director’s wife who participated in an $8 million note secured by a New
York hotel, or what is expected to occur upon the note’s maturation. 67 Plaintiff
65
Pl.’s Answering Br. 26.
66
Plaintiff cites Sonet v. Plum Creek Timber Co., L.P. as support for the proposition
that disclosures regarding the independence of the Special Committee are material.
1999 WL 160174 (Del. Ch. Mar. 18, 1999); Pl.’s Answering Br. 23-24. But, unlike
in the present case, Sonet involved a special committee (1) that did not actually
negotiate with the general partner, (2) where certain members did not see the
committee as a negotiating body, and (3) where representatives of the general
partner sat in on every committee meeting. Sonet, 1999 WL 160174, at *4, *6, *8.
This was in direct contravention of the representations in the relevant disclosure
documents, which explicitly stated that the committee “negotiate[d] solely on behalf
of the Unitholders to mitigate the conflict of interest.” Id. at *8. Thus, the Court
held the disclosures were materially misleading. Id.
67
Compl. ¶ 56. The Notice states under a heading of “Transactions with Related
Parties”:
The Company has an $8 [million] participation in a note
secured by a hotel in New York. Also participating in this
transaction is a group that includes the Company’s Board
Chairman, the wife of the Company’s Board Chairman, two
directors of the Company, the wife of one of the Directors, and
the Company’s pension plan, which, as a group, hold a 62.5%
22
suggests that the two director participants in the note are members of the Special
Committee, and thus, material information about their conflicts has not been
disclosed.
Plaintiff, however, ignores the immediately preceding paragraph contained in
the “Transactions with Related Parties” section of the Notice, which discloses that
Petrocelli’s wife, Lorber, Penner, and Penner’s wife own approximately eight
percent of a limited liability corporation that owns two distribution centers leased to
K-Mart.68 The Company also owns fifty percent of the limited liability
corporation.69 The Special Committee’s members’ names are disclosed along with
the potential conflicts. The subsequent paragraph discussing the $8 million note
does not disclose the specific participants in the note, presumably because the note
does not involve Special Committee members.70 Further, as discussed above in
Section II.B.5, potential conflicts regarding Lorber and Penner are disclosed, and
interest. The participation, which matures in November 2016,
bears interest at 12.0% per annum payable monthly.
Notice Ex. B, at F-17.
68
Notice Ex. B, at F-17.
69
Id.
70
Defendants have offered to produce documents proving that the involved
participants are inside directors and an inside director’s wife, “pursuant to an
appropriate confidentiality agreement,” and thus, not material to the Special
Committee’s independence. See Defs.’ Reply Br. 28 n.12.
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Plaintiff has knowledge of purported ties they had to Petrocelli.71 Plaintiff fails to
allege how the inclusion of additional purported conflicts would alter the “total mix”
of information provided. Plaintiff also does not explain how information about the
post-maturation expectations of the note are material to the decision of whether or
not to seek appraisal in a short-form merger.
III. CONCLUSION
As Plaintiff has failed to allege fraud, illegality, or a disclosure violation, the
sole remedy in challenging the short-form merger is appraisal.72 Thus, the motion
to dismiss this class action complaint seeking a quasi-appraisal remedy is
GRANTED.
IT IS SO ORDERED.
71
See supra Section II.B.5.
72
Glassman v. Unocal Expl. Corp., 777 A.2d 242, 248 (Del. 2001).
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