564 A.2d 1137 (Del. 1989)
All three individuals were original investors in Equity Programs Investment Corporation (“EPIC”), a Virginia corporation established in 1975.1 By 1983 Billman and McCuistion together owned over ninety percent of EPIC while Harnett held the balance.2 In 1977 EPIC created Epic Mortgage, Inc. as a Delaware subsidiary for servicing mortgages on EPIC properties.3 In February 1983, EPIC Mortgage Servicing, Inc. was spun off from EMI and its shares were distributed proportionately.4 Harnett received his certificate for 1,250 shares of EMSI, dated March 2, 1983.5 The following month EPIC and EMI merged into Community Savings and Loan, Inc., a Maryland savings and loan controlled by Billman and McCuistion.6
During the EPIC-CSL merger negotiations Harnett rejected an initial offer of nonconvertible nonvoting preferred shares in CSL.7 Without Harnett's knowledge Billman and McCuistion arranged for EMI to perform EMSI's mortgage servicing business, diverting revenues originally intended for EMSI.8 Harnett did not learn of this diversion until November 1984 when he received notice of the short-form merger of EMSI into Cavalier Oil Corporation and a tender offer of $93,950 for his shares.9 Harnett rejected the offer and elected appraisal rights.10
In October 1983 Harnett filed Harnett I in the United States District Court for the Eastern District of Virginia asserting five counts including common law fraud, federal securities fraud, RICO violations, state securities fraud, and a shareholder derivative claim focused on misrepresentations in the CSL merger.11 That action was dismissed with prejudice in February 1984 pursuant to a settlement agreement that expressly reserved to Harnett the right to assert facts underlying the derivative count as they might affect the value of his stock.12 In February 1985 Harnett filed Harnett II in federal district court asserting federal and state securities claims, common law fraud, and breaches of fiduciary duty.13 The district court awarded damages on the fraud claim but the Fourth Circuit reversed on res judicata grounds.14
Consolidated appraisal proceedings for Harnett's EMSI and ERSI shares were tried in the Court of Chancery.15 After extensive post-trial briefing the Vice Chancellor entered judgment fixing the value of Harnett's EMSI stock at $347,000.16 Cavalier appealed contending the corporate opportunity claim was barred by res judicata and that a minority discount should have been applied.17 Harnett cross-appealed the rejection of his expert's terminal value projections and the refusal to consider his share dilution claim arising from the 1982 assignment of 29,000 EPIC shares.18
Whether Harnett's corporate opportunity claim was barred by res judicata from the prior federal litigation in Harnett I and Harnett II?19
Under Virginia law, which governs the preclusive effect here because the prior federal actions involved pendant state law claims, the party asserting res judicata bears the burden of proving by a preponderance of the evidence that the claim was barred by the prior judgment.20 Parties may agree to dismiss particular claims while preserving others for later assertion in a state court proceeding such as an appraisal action.21
No. The settlement agreement and order of dismissal in Harnett I expressly reserved to Harnett the right to assert the facts underlying the derivative action of Count V as those facts may affect the value of his stock.22 The Court of Chancery found that the parties intended to preserve all facts as they relate to an appraisal action.23 This included the corporate opportunity claim, even though those facts were not known to Harnett at the time of the dismissal in February 1984.24
Cavalier failed to establish a sufficient factual basis for its res judicata defense.25 The corporate opportunity facts would have been treated the same as other facts in count five had they been known and raised in Harnett I.26
Harnett's corporate opportunity claim was not barred by res judicata.27
Whether a corporate opportunity claim may be asserted by a shareholder in a statutory appraisal proceeding under 8 Del.C. § 262?28
The justiciable issue in an appraisal action under 8 Del.C. § 262 is limited to the determination of the fair value of the petitioner's shares on the date of the merger.29 All relevant factors are to be considered in determining fair value.30 Under the unusual facts of this case, the parties consented to accord recognition to derivative-like claims for future valuation purposes.31 Therefore, a corporate opportunity claim that relates directly to the fair value of the shares is cognizable in the appraisal proceeding.32
Yes. The wrongdoing alleged by Harnett relates directly to the fair value of his EMSI stock rather than to the validity of the merger itself.33 The claim is viewed as more personal than derivative given his status as the sole minority shareholder whose claims are directed against the two controlling shareholders.34 The Court of Chancery had authority to determine the corporate opportunity claim because it related to the value of Harnett's EMSI stock.35
A fair value determination in the appraisal action satisfactorily redresses the claimed wrongdoing under the consent reflected in the Harnett I settlement order.36
A corporate opportunity claim may be asserted by a shareholder in a statutory appraisal proceeding under the circumstances presented here.37
Whether a minority discount must be applied in valuing a dissenting shareholder's 1.5% interest in an appraisal action?38
A proceeding under 8 Del.C. § 262 requires the Court of Chancery to determine the fair value of the dissenting stockholder's proportionate interest in the corporation as a going concern.39 The court is not required to apply further weighting factors at the shareholder level such as discounts to minority shares for asserted lack of marketability.40
No. Harnett held a 1.5 percent interest in EMSI.41 The Vice Chancellor refused to apply a minority or marketability discount.42 He concluded that the objective of a section 262 appraisal is to value the corporation itself as distinguished from a specific fraction of its shares as they may exist in the hands of a particular shareholder.43 Discounting individual share holdings would inject speculation on marketability factors into the appraisal process and impose a penalty for lack of control that unfairly enriches the majority shareholders.44
A minority discount must not be applied in valuing a dissenting shareholder's 1.5% interest in an appraisal action.45
Whether the Court of Chancery properly rejected the terminal value projections offered by Harnett's expert witness in the discounted cash flow analysis?46
In an appraisal proceeding the Court of Chancery acts as the trier of fact and may reject expert projections that lack a reliable factual premise.47 Rejection is proper when cash flows are not stabilized as of the terminal date or when the selection of the base year for capitalizing projected earnings yields an arbitrary result when compared to other valuations.48
Yes. Harnett's expert Chadbourne projected a terminal value of $110 million based on twelve times the projected 1989 earnings.49 The Vice Chancellor found that stabilization of cash flows as of the terminal date had not been established.50 He also found that the selection of 1989 as the base year inflated the terminal value nearly three times more than the lowest base year of the period.51
The court therefore made its own determination of value through a capitalization of historical earnings approach that reached a terminal value in 1990 for EMSI of $43,033,914.52
The Court of Chancery properly rejected the terminal value projections offered by Harnett's expert witness.53
Whether Harnett's share dilution claim based on the 1982 assignment of 29,000 EPIC shares could be considered in the appraisal proceeding?54
The focus of an appraisal action under 8 Del.C. § 262 remains on the determination of the intrinsic worth of the merged corporation on a per share basis.55 A dispute over the amount of shares held by a dissident shareholder is outside the scope of the statutory proceeding because it injects a nonvaluation task incompatible with the appraisal purpose.56
No. Harnett's share dilution claim arose from the 1982 assignment of an option to purchase 29,000 shares of EPIC common stock by Billman and McCuistion.57 The Vice Chancellor ruled that the claim did not survive the dismissal of Harnett I because it did not affect the value of Harnett's stock for appraisal purposes.58 Any attempt to reallocate holdings among shareholders is irrelevant to the appraisal process, which is limited to the company level and does not involve the size of a particular shareholder's interest.59
Harnett's share dilution claim based on the 1982 assignment of 29,000 EPIC shares could not be considered in the appraisal proceeding.60