429 A.2d 497 (Del. 1981)
In 1974 Vickers Energy Corporation, a wholly-owned subsidiary of Esmark, Inc., already holding a majority of the issued and outstanding shares of TransOcean Oil, Inc., made a tender offer at $12 per share and acquired approximately 4,228,000 additional shares from TransOcean stockholders.1
Stockholders who sold their shares pursuant to the tender offer filed a class action in the Court of Chancery on October 18, 1974, against Vickers, Esmark, and three TransOcean directors—Stormy F. Smith, William A. Alexander, and Edward J. Hudson—alleging nondisclosure of material facts surrounding the offer.2 A prior appeal resulted in a 1977 Delaware Supreme Court decision that found Vickers had failed to disclose two facts: a TransOcean management petroleum engineer’s calculation that net asset value was significantly higher than the amount disclosed, and Vickers’ authorization of open-market purchases at prices up to $15 per share. The case was remanded for further proceedings.3
After remand, a second trial was held in May, June, and July 1978.4 On June 6, 1979, the Court of Chancery applied an appraisal methodology, valued each TransOcean share at $11.85 as of the tender-offer date, and entered judgment for all defendants because class members had received $12 per share.5
By the time of the present appeal, TransOcean had been merged into Esmark.6 The average daily trading volume in TransOcean shares after the tender offer was approximately 600 shares, and expert testimony at the 1978 trial placed per-share values ranging from $10 to $41.40.7
Whether the Court of Chancery erred by applying an appraisal measure of damages from Poole v. N. V. Deli Maatschappij to determine whether class members were damaged by the nondisclosures?8
A claim founded on a breach of fiduciary duty permits a different form of relief, that is, an accounting or rescission or other remedy afforded for breach of trust by a fiduciary, rather than the out-of-pocket appraisal measure applied in misrepresentation cases like Poole v. N. V. Deli Maatschappij.9
Yes. The Chancellor erroneously relied on the Poole case and on an appraisal formula in determining whether relief should be granted.10 The established facts show that Vickers as majority shareholder breached its fiduciary duty of complete candor by failing to disclose the petroleum engineer's higher net asset valuation and the authorization for open-market purchases up to $15 per share.11 Because this litigation involves a fiduciary breach found by the Court rather than a pure misrepresentation claim as in Poole, the appraisal approach with its built-in limitation excluding gain to the acquirer is inapplicable.12
The Court of Chancery therefore applied an incorrect rule of law when it valued shares at $11.85 using the weighted appraisal factors and entered judgment for defendants.13
The Court of Chancery erred by applying the appraisal measure of damages from Poole.14
Related opinions on this issue
Justice Quillen dissents on the ground that the Chancellor possessed discretion to select an out-of-pocket appraisal remedy by analogy to Poole.15 He emphasizes that the Chancellor properly assessed the evidence from the 1978 trial after ten trial days and took the case as the evidence warranted.16 Quillen notes that the Chancellor evaluated the particular fiduciary duty as not highly culpable and considered mitigation factors in the factual context.17
He concludes there was no abuse of discretion in choosing the remedy and that the majority improperly overrides equitable flexibility by mandating a different damage theory instead of deferring to the trial court's choice of relief.18
Whether rescission or rescissory damages measured by the value of the shares at the time of judgment is the appropriate remedy?19
When rescission is impractical because the defendant has disposed of the stock or the corporation has merged, the proper measure of damages is the equivalent value of the stock at the time of resale or at the time of judgment, allowing the beneficiary to recover advantages gained by the fiduciary from the breach.20
Yes. Rescission would restore the parties to the status quo before the 1974 tender offer sales, but TransOcean has since merged into Esmark, rendering rescission infeasible.21 The established facts show Vickers acquired and held the shares after breaching its duty of complete candor, so rescissory damages measured by the value at the time of judgment are required to capture the increment in value Vickers enjoyed.22 The Court therefore directs that damages be calculated between a minimum of $15 and a maximum of $41.40 per share as of the July 15, 1978 close of the damages trial record, with credit for the $12 already paid plus 7% interest.23
Rescissory damages measured by the value of the shares at the time of judgment is the appropriate remedy.24
Related opinions on this issue
Justice Quillen maintains that the Chancellor acted within his discretion in selecting the appraisal remedy instead of rescissory damages.25 He notes that the Chancellor took the case as the evidence warranted after ten trial days and found the fiduciary duty not as compelling as others.26 Quillen viewed mitigation differently from the majority and would uphold the Chancellor's choice.27
He concludes that the majority's mandated damage theory improperly overrides the Chancellor's equitable flexibility in choosing relief based on the specific circumstances of the case.28
Whether class members must prove economic loss or injury to obtain relief for the breach of fiduciary duty?29
A party who gave up shares in a transaction preceded by less than a fair disclosure of facts germane to the transaction need not prove injury or economic loss as a condition of relief, because the principle prohibiting a fiduciary from keeping what was acquired through nondisclosure governs.30
No. Defendants argued under Mills v. Electric Auto-Lite Co. that plaintiffs must show economic loss, but the established facts demonstrate a breach of fiduciary duty through nondisclosure of the engineer's valuation and the $15 purchase authorizations.31 The Court focuses on the prohibition against a fiduciary retaining benefits from a transaction lacking full disclosure, without requiring plaintiffs to prove separate injury beyond the nondisclosure itself.32 The appraisal finding of $11.85 per share therefore does not defeat relief.33
Class members need not prove economic loss or injury to obtain relief for the breach of fiduciary duty.34
Whether class members were required to mitigate damages by repurchasing TransOcean shares on the open market after the nondisclosures became public?35
Mitigation of damages is not required where liability has been established for breach of fiduciary duty in a tender offer with privity between the parties, particularly when open-market repurchases would be unreasonable given low trading volume and the fiduciary's failure to issue a corrective disclosure.36
No. The established facts show average daily trading of only about 600 shares after Vickers acquired 4,228,000 shares and that no corrective press release was issued by Vickers.37 Requiring class members to repurchase shares on the open market to mitigate would be unreasonable because purchase decisions depend on price, potential, management, corporate policy, and personal finances, and the limited volume could not support widespread rescission purchases.38 The Court therefore refuses to deny or limit relief on mitigation grounds, distinguishing Mitchell v. Texas Gulf Sulphur Co. on the basis of privity and absence of hardship to the corporation.39
Class members were not required to mitigate damages by repurchasing TransOcean shares on the open market.40
Related opinions on this issue
Justice Quillen would uphold the Chancellor's consideration of mitigation.41 He notes that the nondisclosures were public by the 1975 trial and the stock price remained below $12.42 Quillen states it is difficult to say from the appellate perch that it was legally improper to consider that no genuine effort to replace tendered shares appears to have been made.43
He concludes the Chancellor properly viewed mitigation in the factual context of the case and that the majority should not override that assessment.44
Whether the individual TransOcean directors are subject to personal liability arising from the tender offer transaction?45
Individual directors who are not shown on the record to have any basis for liability arising from or related to the majority shareholder's obligation to pay rescissory damages are entitled to judgment in their favor.46
No. The established facts identify Stormy F. Smith, William A. Alexander, and Edward J. Hudson as TransOcean directors who were parties to the litigation.47 The Court determines that the class claim for rescissory damages relates only to Vickers, which purchased the shares, and perceives no basis on the present record for personal liability against the individual directors arising from or related to that determination.48 The directors are therefore entitled to affirmance of the judgment in their favor.49
The individual TransOcean directors are not subject to personal liability arising from the tender offer transaction.50