498 A.2d 1099 (Del. 1985)
On March 1, 1983, Olin Corporation acquired 63.4 percent of the common stock of Philip A. Hunt Chemical Corporation from Turner and Newall Industries, Inc. at a price of $25 per share pursuant to a stock purchase agreement.1 The agreement required Olin to pay at least $25 per share if it acquired the remaining Hunt shares within one year through a merger or similar transaction.2 Olin later acquired additional shares on the open market, bringing its total ownership to approximately 64 percent.3 Olin filed a Schedule 13D with the Securities and Exchange Commission that recited the one-year commitment and noted that any later acquisition price might be greater or less than $25 per share.4
After the closing, the two Hunt directors affiliated with Turner and Newall resigned and were replaced by Olin executives John M. Henske and Ray R. Irani.5 Olin's internal memoranda, including a September 19, 1983 confidential document sent to three Olin and Hunt directors, evaluated the advantages and disadvantages of completing a backend acquisition before or after the one-year period expired.6 No merger discussions occurred during the commitment period, and Olin publicly stated it had no present intention to acquire the remaining shares.7
On March 23, 1984, Olin senior management met with Morgan, Lewis, Githens & Ahn, Inc. to discuss acquiring the minority shares at $20 per share.8 Four days later Morgan Lewis delivered a fairness opinion supporting that price, noting it had not met with Hunt management due to confidentiality requirements and had not considered the prior $25 commitment.9 The same day Olin's Finance Committee approved the $20 price, and the next morning Olin and Hunt issued a joint press release announcing the cash-out merger.10
Hunt's board then appointed a Special Committee of four outside directors that retained Merrill Lynch as financial advisor and Shea and Gould as legal counsel.11 The committee met on multiple occasions, heard presentations indicating a value range of $19 to $25 per share, recommended the $20 price as fair but not generous, and ultimately approved it after Olin declined to increase the offer.12 On June 7, 1984 Hunt issued a proxy statement describing the merger and the one-year commitment.13 The merger closed on July 5, 1984.14
Minority stockholders filed consolidated class actions in the Court of Chancery challenging the merger.15 The Vice Chancellor granted the defendants' motion to dismiss and denied leave to amend the complaints.16 The plaintiffs appealed those rulings to the Delaware Supreme Court.17
Whether the trial court erred in dismissing the complaints on the ground that absent deception the plaintiffs' sole remedy under Weinberger is an appraisal?18
The legal rule is that in cash-out mergers the appraisal remedy is not necessarily exclusive when procedural unfairness having a reasonable bearing on substantial issues affecting the price is alleged.19 Under Weinberger the entire fairness standard requires careful scrutiny of both fair price and fair dealing, the latter embracing questions of when the transaction was timed, how it was initiated, structured, negotiated, disclosed to the directors, and how the approvals of the directors and the stockholders were obtained.20 While a plaintiff's monetary remedy ordinarily should be confined to appraisal, the Chancellor retains historic powers to grant other relief where fraud, misrepresentation, self-dealing, deliberate waste of corporate assets, or gross and palpable overreaching are involved, and the duty of fairness does not turn solely on issues of deception.21
Yes. The trial court erred because the plaintiffs alleged specific acts of unfair dealing in the timing of the merger to avoid the one-year commitment.22 If true, those acts constitute breaches of fiduciary duty that substantially affected the offering price.23 The acts are unrelated to judgmental factors of valuation that appraisal addresses.24 The complaints aver that Olin anticipated owning 100 percent of Hunt from the outset yet delayed the transaction until after the commitment period expired.25 Internal memoranda evaluated the $7.3 million extra cost of paying $25 per share.26 The chief executive officer stated that the commitment meant nothing.27 The special committee's quick surrender without meaningful price negotiation further supports the claim of overreaching.28
These matters of procedural fairness cannot be resolved on a motion to dismiss.29 They require the Court of Chancery to focus closely upon Weinberger's mandate of entire fairness.30
The trial court erred in limiting the remedy to appraisal and should have denied the motion to dismiss so that the plaintiffs could pursue their claims of unfair dealing.31
Whether the plaintiffs' allegations of specific acts of unfair dealing in the timing of the merger to avoid the one-year commitment state claims upon which relief can be granted?32
On a motion to dismiss for failure to state a claim, it must appear with reasonable certainty that a plaintiff would not be entitled to the relief sought under any set of facts which could be proven to support the action.33 A complaint need only give general notice of the claim asserted and will not be dismissed unless it is clearly without merit, either as a matter of law or fact.34 Specific acts of fraud, misrepresentation, or other items of misconduct must be carefully examined.35 Inequitable conduct will not be protected merely because it is legal.36
Yes. The plaintiffs' allegations state claims upon which relief can be granted because they aver specific facts indicating that Olin knew it would eventually acquire Hunt but delayed doing so to avoid paying $25 per share.37 The confidential Berardino memorandum sent to three Olin and Hunt directors detailed the disadvantages of paying a higher price during the one-year commitment, including the immediate control costing approximately $7.3 million more than waiting until mid-1984.38 The deposition testimony of Olin's chief executive officer indicated that the one-year commitment meant nothing. The apparent absence of any meaningful negotiations as to price, coupled with the special committee's quick surrender in the face of Olin's proposal, supports a claim of unfair dealing and overreaching that has a substantial impact on the price offered.39
These issues of divided loyalty and procedural fairness cannot be resolved by a motion to dismiss.40 They deserve more considered analysis under the entire fairness standard.41
The allegations of unfair dealing in the timing of the merger state viable claims for breach of fiduciary duty, and the motion to dismiss should have been denied with leave to amend granted.42