In re Orchard Enterprises, Inc.
88 A.3d 1
Del. Ch.2014Background
- Dimensional Associates (controller) owned ~53% voting power of The Orchard and proposed a 2010 cash-out merger paying $2.05/share to minority holders; merger closed July 29, 2010.
- A Special Committee of purportedly independent directors (chaired by Donahue) negotiated with Dimensional; Fesnak provided a fairness opinion that treated the Series A preferred as having a $25M liquidation preference rather than an as-converted value.
- Proxy materials included mixed statements about whether the merger would trigger the Series A liquidation preference; one statutory notice item misstated that, absent an amendment, the Series A would receive its liquidation preference.
- Post-closing, Orchard’s preferred was carried on financials at ~$7.0M (as-converted value); an appraisal action later determined fair value for common was $4.67/share (higher than $2.05 deal price).
- Plaintiffs sued for breach of fiduciary duty (disclosure, loyalty) alleging unfair process/price; cross-motions for summary judgment followed.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Materiality of proxy disclosures about Series A liquidation preference | Proxy misstated that without the Block Amendment the Series A would be paid; this was material and misleading | Accurate overall disclosure and other correct sections cured any error | Court: one notice item was materially false as a matter of law (summary judgment for plaintiffs on that point) |
| Adequacy/accuracy of description of Fesnak valuation and Series A treatment | Fesnak followed Special Committee instructions (not independent); that omission rendered proxy misleading | Fesnak independently decided to use liquidation preference; proxy accurately described its work | Court: disputed facts exist; cannot resolve on summary judgment (issue for trial) |
| Standard of review for entire transaction (business judgment vs. entire fairness) | Plaintiffs: entire fairness applies because controller stood on both sides and did not pre-commit to committee + majority-of-minority protections up front | Defendants: business judgment or at least burden-shifting; special committee + majority-of-minority suffice | Court: entire fairness applies; burden of persuasion remains on defendants (summary judgment for plaintiffs on standard) |
| Remedies available (quasi-appraisal, rescissory damages, exculpation) | Plaintiffs: quasi-appraisal and rescissory damages are available remedies; some defendants not exculpated | Defendants: limit remedies (no rescissory, no quasi-appraisal); Section 102(b)(7) exculpates committee members | Court: premature to decide; quasi-appraisal and rescissory damages remain possible depending on trial results; Section 102(b)(7) exculpation cannot be resolved pretrial when entire fairness governs |
Key Cases Cited
- Weinberger v. UOP, Inc., 457 A.2d 701 (Del. 1983) (disclosure failures in a cash-out merger can render the transaction not entirely fair and authorize quasi-appraisal/out-of-pocket remedies)
- Lynch v. Vickers Energy Corp., 429 A.2d 497 (Del. 1981) (rescissory damages are an equitable remedy and may be the monetary equivalent of rescission)
- Glassman v. Unocal Exploration Corp., 777 A.2d 242 (Del. 2001) (short-form merger framework: appraisal will generally be exclusive remedy absent fraud or nondisclosure)
- Berger v. Pubco Corp., 976 A.2d 132 (Del. 2009) (where disclosure duty is breached in a short-form merger, minority shareholders may pursue class fiduciary claims and out-of-pocket/quasi-appraisal remedies)
- In re Walt Disney Co. Derivative Litig., 906 A.2d 27 (Del. 2006) (bad faith is a subset of loyalty inquiry and can rebut business judgment rule)
- Malpiede v. Townson, 780 A.2d 1075 (Del. 2001) (application of §102(b)(7) at pleadings stage in arm’s-length contexts when duty of loyalty not plausibly alleged)
- Emerald P’rs v. Berlin, 787 A.2d 85 (Del. 2001) (entire fairness requires trial when factual disputes about loyalty/independence exist)
- Technicolor Plenary III (Cede & Co. v. Technicolor, Inc.), 663 A.2d 1134 (Del. Ch. 1994) (court uses appraisal/valuation concepts when assessing fair price under entire fairness)