380 A.2d 969 (Del. 1977)
In August 1974 North American Philips Corporation incorporated North American Philips Development Corporation solely to acquire shares of The Magnavox Company.1 On August 28, Development offered to buy all Magnavox common shares at $8 per share.2 The tender offer included a statement informing Magnavox shareholders of Development's intention to acquire the entire equity interest in Magnavox, and advising them of the possible effects thereof, including delisting of shares by the New York Stock Exchange, creation of an unfavorable market, loss of information rights, and use of other means of acquisition such as open market purchases, tender offers, or a merger.3
Magnavox directors initially opposed the offer, notifying shareholders that the $8 price was inadequate in light of book value exceeding $11 per share.4
In September 1974 the managements of Magnavox, North American, and Development reached a compromise that raised the tender price to $9 per share and granted two-year employment contracts at existing salaries to sixteen Magnavox officers.5 Development then acquired approximately 84.1 percent of Magnavox's outstanding common stock.6 In May 1975 Development formed T.M.C. Development Corporation as a wholly-owned subsidiary to carry out a merger with Magnavox.7
The boards of Magnavox and T.M.C. unanimously approved the merger plan.8 In June 1975 Magnavox shareholders received notice of a special meeting scheduled for July 24, 1975, together with a proxy statement stating a book value of $10.16 per share and a merger price of $9 per share and advising that approval was assured because Development's holdings alone supplied the statutory majority.9 At the time four of Magnavox's nine directors also served as directors of North American and three others held employment contracts plus options to purchase five thousand North American shares effective upon the merger.10 The meeting was held in Delaware, proxies were voted, and the merger was completed.11
Plaintiffs, who held Magnavox common stock on the day before the merger, filed a class action in the Court of Chancery against Magnavox, North American, Development, and individual Magnavox managers.12 The complaint alleged that the merger was fraudulent because it served no business purpose other than to remove the public minority at a grossly inadequate price.13 It also alleged that defendants breached fiduciary duties by approving the merger at a known inadequate price.14 Finally, it claimed that the proxy materials violated the anti-fraud provision of the Delaware Securities Act.15 Defendants moved to dismiss for failure to state a claim; the Court of Chancery granted the motion.16 Plaintiffs appealed to the Supreme Court of Delaware.17
Whether a merger accomplished under 8 Del.C. § 251 solely to eliminate minority shareholders violates the fiduciary duties owed by the majority to the minority?18
A majority stockholder owes to the minority stockholders a fiduciary obligation in dealing with the latter's property.19 In an interested merger, the dominant corporation has the burden of establishing its entire fairness to the minority stockholders.20 Use of corporate power solely to eliminate the minority is a violation of that duty.21
Yes. The litigation arose from a series of events beginning in August 1974 when North American incorporated Development for the purpose of acquiring Magnavox shares through a tender offer at eight dollars per share.22 Magnavox directors initially opposed the offer as inadequate given the book value exceeding eleven dollars per share.23 After a compromise raising the price to nine dollars and granting employment contracts, Development acquired 84.1 percent of the stock and formed T.M.C. to effect a merger approved by the boards despite conflicts among some directors.24
The merger was accomplished solely to eliminate the minority shareholders at a cash price determined by the majority.25 The majority stood on both sides of the transaction and failed to demonstrate entire fairness beyond mere statutory compliance.26 Therefore, the merger violates the fiduciary duties owed by the majority to the minority.27
The merger accomplished under 8 Del.C. § 251 solely to eliminate minority shareholders violates the fiduciary duties owed by the majority to the minority.28
Related opinions on this issue
Justice McNeilly concurs in the result.29 He agrees with the majority that a § 251 merger made for the sole purpose of freezing out minority stockholders is an abuse of the corporate process.30 He agrees that the complaint states a cause of action for violation of fiduciary duty.31 McNeilly emphasizes that Sterling v. Mayflower establishes an avenue for judicial scrutiny with a firm foundation based upon factual determinations of fundamental fairness and economic reasonableness which should be the guideline for future cases.32
It is not disputed that majority stockholders owe to the minority a fiduciary obligation in dealing with the latter's holdings.33 Full compliance with the statutory requirements to effect a merger does not insulate a breach of that duty from judicial intervention, although it may affect the relief afforded.34 In his view, a complaint alleging such a breach states a cause of action, shifting the burden to the majority to establish the entire fairness of the transaction.35 To determine whether that burden has been met under Sterling, the Court must scrutinize the business purpose, or economic necessity, desirability and feasibility involved, evidence of self-serving, manipulation, or overreaching, and all other relevant factors of intrinsic fairness or unfairness.36
Upon finding a breach of the fiduciary duty owed, the Court must then grant such relief as the circumstances require, by injunction, appraisal, damages, or other available equitable relief, if any, keeping in mind the continuing legislative approval of mergers and the judicially mandated avoidance of their disruption by dissenting stockholders.37
Whether full compliance with the procedural requirements of 8 Del.C. § 251 insulates a merger from judicial review when breach of fiduciary duty is alleged?38
No. The defendants complied with the procedural requirements of section 251 by obtaining director and shareholder approvals and filing the necessary documents.41 However, the presence of a breach of fiduciary duty, as alleged in the complaint that the merger served no purpose other than to freeze out the minority, subjects the transaction to judicial review under the fiduciary duty standards.42 Statutory compliance does not insulate the merger from such review.43
Full compliance with the procedural requirements of 8 Del.C. § 251 does not insulate a merger from judicial review when breach of fiduciary duty is alleged.44
Whether minority shareholders dissatisfied with a cash-out merger have remedies other than an appraisal proceeding under 8 Del.C. § 262?45
Yes. Although an appraisal proceeding is available under section 262 for dissenting shareholders, the complaint alleges a violation of fiduciary duty in the cash-out merger.48 The court may grant relief such as nullifying the merger or awarding damages in addition to or instead of appraisal when the fiduciary duty has been breached.49
Minority shareholders dissatisfied with a cash-out merger have remedies other than an appraisal proceeding under 8 Del.C. § 262.50
Whether the Delaware Securities Act applies to proxy materials mailed in connection with a merger vote held in Delaware when the materials originated outside the state and plaintiffs were not solicited here?51
No. The proxy materials originated outside Delaware, plaintiffs were residents of Pennsylvania and not solicited in Delaware, and the contract was not made in the state.54 The fact that the merger vote was held in Delaware is too fragile a basis to establish subject matter jurisdiction over the alleged fraud.55 Therefore, the Delaware Securities Act does not apply.56
The Delaware Securities Act does not apply to proxy materials mailed in connection with a merger vote held in Delaware when the materials originated outside the state and plaintiffs were not solicited here.57