CURRENT MONTH (June 2023)
Business Litigation
Delaware Court of Chancery Rules that Corporations Seeking Written Consent of Stockholders to Mergers Must Give Notice of Appraisal Rights Twice, with the Second Notice Triggering the 20-Day Period to Demand Appraisal
By James G. McMillan, III, Esq.
Under the Delaware appraisal statute, stockholders of Delaware corporations who do not vote in favor of a merger may demand appraisal of their shares by the Delaware Court of Chancery. In order to exercise appraisal rights, stockholders must “perfect” their appraisal rights by demanding appraisal from the corporation within a prescribed 20-day period. In Flinn Flexer v. Runtriz, Inc., C.A. No. 2022-1020-NAC, Vice Chancellor Nathan A. Cook of the Delaware Court of Chancery held that under 8 Del. C. § 262, where the merger is approved by written consent of the stockholders, the 20-day period begins to run from the date that the corporation provides notice to stockholders that the merger has been approved.
Factual Background
On June 30, 2022, Runtriz, Inc. emailed a notice titled Confidential Information Statement to its stockholders that its board of directors had approved a merger of the corporation with and into Radius Networks, Inc. The notice sought the written consents of stockholders to the merger, and advised them of their appraisal rights under Section 262 of the Delaware General Corporation Law (DGCL).
On July 13, 2022, Runtriz’s Chief Executive Officer sent a letter by email to stockholders informing them that the merger had been approved by written consent of stockholders. The letter did not inform the stockholders of their appraisal rights or include a copy of the statute. On July 14, 2022, Runtriz filed a certificate of merger with the Delaware Secretary of State, making the merger effective.
On August 2, 2022, Flinn Flexer, a record stockholder in Runtriz, sent an appraisal demand to the corporation. The date was 20 days after the letter giving notice of stockholder approval, but 32 days after the Confidential Information Statement.
Flexer filed his petition for appraisal in the Court of Chancery on November 10, 2022. Runtriz sought dismissal, arguing that Flexer failed to perfect his appraisal rights because he served his appraisal demand more than 20 days after the Confidential Information Statement was issued.
Runtriz noted that Section 262(d)(1)—mergers approved by vote at stockholder meeting—requires notice of appraisal rights not less than 20 days before the meeting. Based on that requirement, Runtriz argued that the notice of appraisal rights had to be given at least 20 days before solicitation of the written consent.
Vice Chancellor Cook rejected Runtriz’s argument, finding that “the drafters of Delaware’s appraisal statute unambiguously chose to treat the procedures for making an appraisal demand in connection with a merger approved by the written consent of stockholders differently from a merger approved at a stockholders meeting.” The Court pointed out that Section 262(d)(1) “uses forward-looking language—it addresses a merger that ‘is to be submitted for approval at a meeting of the stockholders.’ In contrast, Section 262(d)(2) uses past tense language—it addresses a merger that ‘was approved [by written consent] pursuant to Section 228.’” The Court concluded that “Section 262(d)(2) requires that the triggering notice be provided after the merger was approved by stockholders through written consent.” The Court found that this interpretation is consistent with Section 228(e) of the DGCL, which requires notice to stockholders of action having been taken by written consent of stockholders.
Thus, where a corporation seeks approval of a merger by written consent of stockholders, it must provide two notices of appraisal rights. The first, under basic disclosure law, when it solicits written consent, and the second under DCGL Section 262(d)(2) when it provides notice of stockholder approval. The 20-day clock does not begin running until the second notice has been given.
Petitioner Flinn Flexer is represented by the author and by Theodore A. Kittila, Esquire, of Halloran Farkas + Kittila LLP.
UIP: Delaware Supreme Court Affirms that Stock Issuance Complied with Schnell, Unocal, and Blasius
By K. Tyler O’Connell of Morris James LLP
In Coster v. UIP Companies, Inc., ___ A.3d ___, 2023 WL 4239581 (Del. Jun. 28, 2023), the Delaware Supreme Court affirmed the Court of Chancery’s post-trial holding that extraordinary circumstances justified a dilutive stock issuance intended to affect stockholder voting rights.
After the death of a co-founder, who also was one of two 50% stockholders, his shares transferred to his spouse. The parties were unable to agree on a buyout of her shares. Subsequently, the stockholders did not agree, and deadlocked, on electing new directors. The spouse then brought an action seeking the appointment of a custodian under 8 Del. C. § 226, with a mandate including broad rights to manage the business. The directors feared that the appointment of a custodian with such a broad mandate might cause key customers to exercise termination rights in their agreements, which would imperil the business. To preserve the business, the directors approved a stock issuance to a key employee, altering the 50/50 ownership structure. The directors did this to break the stockholder deadlock, to moot the request for a custodian, to further a succession plan that the co-founder had supported, and to honor a longstanding promise to provide the key employee an equity interest. In its post-trial decision, the Court of Chancery found that the directors were not ill-motivated, and in fact they had the requisite compelling justification for the disputed stock issuance.
On appeal, the Delaware Supreme Court reviewed certain controlling precedents—including Schnell v. Chris Craft Industries, Inc., 285 A.2d 437 (Del. 1971), Unocal v. Mesa Petroleum Co., 493 A.2d 946 (Del. 1985), and Blasius Industries, Inc. v. Atlas Corp., 564 A.2d 651 (Del. 1988). The Supreme Court reasoned that “… Schnell and Blasius review, as a matter of precedent and practice, have been and could be” analyzed within the Unocal framework. Under Unocal, defensive measures in response to a threat to control are subject to enhanced scrutiny, both for being well-motivated to protect important corporate interests, and also as not being unduly coercive or preclusive of stockholder voting rights. Here, the stock issuance was motivated by a need to protect important corporate interests, as discussed above. With respect to the effect on the voting rights, while the addition of a third stockholder may have “foreclosed [the plaintiff] from perpetuating the deadlock,” the new three-stockholder regime may have more effectively allowed her to exercise control, such as by casting a “swing vote” at stockholder meetings on matters where the other two were divided. Accordingly, the Supreme Court affirmed the Court of Chancery’s ruling that the defendant-directors sustained their burden to show that the stock issuance complied with their fiduciary duties.
Delaware Court of Chancery Denies Disney Stockholder’s Request for Additional Documents Concerning Company’s Opposition to Florida’s “Don’t Say Gay” Law
By K. Tyler O’Connell of Morris James LLP
Stockholders of Delaware corporations have the qualified right to inspect “books and records”—a term of art for documents in any form—to the extent necessary to satisfy a stockholder’s proper purpose. See 8 Del. C. § 220. In Simeone v. The Walt Disney Company, 2023 WL 4208481 (Del. Ch. Jun. 27, 2023), the Delaware Court of Chancery addressed a stockholder’s request for additional information about Disney’s decision to publicly oppose Florida House Bill 1557, since enacted into law, limiting school instruction on sexual orientation and gender identity. After initially remaining largely silent, Disney changed course after considering views expressed by its employees and creative partners. One of Florida’s largest employers, Disney eventually spoke publicly against the law. In response to the plaintiff-stockholder’s books and records demand to investigate that decision, Disney produced its policies concerning charitable and public policy engagement, as well as the board minutes relating to the decision. In this post-trial decision, the Court of Chancery rejected the stockholder’s request for the directors’ independence questionnaires and communications (such as emails, if any) relating to the decision.
The stockholder-plaintiff testified as to the process in which he was solicited by counsel compensated by a third-party organization that was supportive of the legislation. His understanding of the demand and the information it sought were not consistent with the demand document. In light of that testimony, the Court of Chancery found that the purposes in the demand were not the stockholder’s own purposes, as opposed to being those of counsel who solicited his involvement. The Court also reasoned that the stockholder lacked the necessary “credible basis” to suspect wrongdoing at Disney. The Court explained that, as a general matter, choosing “to speak (or not to speak) on public policy issues is an ordinary business decision” that may be delegated, but for which the board of directors retains the “ultimate responsibility.” Although the stockholder alleged that several board members were involved in political or social organizations that opposed the bill, that did not itself create any credible basis to suspect a conflict of interest with Disney. Nor did it call into question the board’s deliberative process. In addition, with respect to the additional documents requested, the Court reasoned that the plaintiff was not entitled to directors’ independence questionnaires and informal communications “to search for hypothetical conflicts.” Rather, the formal board materials produced in response to the demand were sufficient to satisfy any proper purpose.
