Krieger v. Wesco Financial Corporation: Court of Chancery Applies Unified Standard of Review to Controlling Stockholder Transaction and Considers Entitlement to Appraisal Rights in Cash/Stock Election Transaction
August 1, 2011
In Krieger v. Wesco Financial Corporation, C.A. No. 6176-VCL (Del. Ch. May 10, 2011)(TRANSCRIPT), the Delaware Court of Chancery denied plaintiff stockholder’s motion for a preliminary injunction against a proposed acquisition of Wesco Financial Corporation (the “Company”) by Berkshire Hathaway (“Berkshire”), the holder of 80.1% of the Company’s common stock, in which Berkshire sought to acquire the remaining outstanding shares of common stock.
The transaction was negotiated under the direction of and approved by a fully empowered and independent special committee of the board of directors of the Company and was subject to a nonwaivable majority of the minority voting condition. Additionally, to the extent that no transaction was approved, the Company would continue to operate as it did prior to the proposal and Berkshire would maintain its 80.1% ownership of the Company. Under the terms of the proposed acquisition, Company stockholders would be entitled to elect either Berkshire Class B shares or cash valued at the book value per share of the Company, without any proration or reallocation.
The Court followed the “unified standard of review” of In re CNX Gas Corp. Shareholder Litigation, 4 A.3d 397 (Del. Ch. May 25, 2010), under which the business judgment rule presumptively applies where a transaction is (i) negotiated and approved by a special committee and (ii) conditioned on the affirmative vote of a majority of the unaffiliated stockholders. The Court found that the transaction satisfied both prongs of the unified standard of review and refused to issue the preliminary injunction. In reaching its conclusion, the Court did not find plaintiff’s arguments persuasive that certain members of the special committee were interested based on their ownership of shares of Berkshire. The Court also rejected plaintiff’s argument that the majority of the minority vote was defective because it failed to exclude the Company’s largest minority stockholder who was also a member of the special committee. The Court, in declining to exclude such stockholder, noted that although there may be times when the Court would be concerned about the divergent interests of a large stockholder and other minority stockholders, this was not such an instance.
The plaintiff stockholder also asserted that stockholders were entitled to appraisal rights in connection with the permitted acquisition and, relatedly, that the Company did not adequately disclose in the proxy statement the existence of such appraisal rights. The Company’s proxy statement stated that appraisal rights are only available under Delaware law where stockholders are required to accept cash for their shares and, because stockholders were able to choose between cash or stock (although the default option was receiving cash consideration), neither the Company nor Berkshire “believe[d] that Wesco shareholders will have any appraisal rights with respect to the shares of Wesco common stock they hold in connection with the merger.” The Court appeared to be unpersuaded by the plaintiff stockholder’s argument that the option to choose between cash or shares, with a default of cash, resulted in a stockholder being “required to” accept cash for purposes of appraisal rights. Similarly, the Court was unwilling to find that the Company’s description of its view of the matter in the proxy statement was an inadequate disclosure. Rather, the Court found that the Company had expressed its view on the unsettled matter of law and held that such statement was sufficient under General Datacomm Industries v. Wisconsin Investment Board, 731 A.2d 818 (Del. Ch. 1999). Moreover, the Court found that the threat of irreparable harm to the stockholders if they were in fact entitled to appraisal rights was de minimis, as any such harm could be remedied at a later time as part of a quasi-appraisal proceeding.