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Law School Case Brief

In re PNB Holding Co. S'holders Litig. - 2006 Del. Ch. LEXIS 158 (Ch. Aug. 18, 2006)


Under Delaware law, stockholders who do not vote for a merger transaction and who simply accept the transactional consideration rather than seek appraisal are not barred from making or participating in an equitable challenge to the transaction. Where the claims of unfair dealing with regard to a merger do not rise to the level of fraud the court should primarily focus on whether the price was unfair.


The stockholders of a rural Illinois bank holding company, PNB Holding Company, cashed out in a merger that had the purpose and effect of allowing PNB to reclassify itself as a subchapter S corporation. The stockholders accepted the merger consideration but through class counsel complained that defendants, the company's directors, breached their fiduciary duties and that the merger was unfair. The stockholders claimed that the merger was subject to heightened review because the company directors, and many family members, remained in the circle of company ownership after the company's conversion into an S corporation while the numerical majority of stockholders were cashed-out.


In this shareholders' litigation where some claimed that the company directors breached their fiduciary and that he merger was unfair, was the merger subject to entire fairness review?




The Chancery Court of Delaware rejected the argument that the merger was subject to heightened review. According to the Court, the largest bloc held by any company director was 10.6 percent, and the directors were not bound together by voting agreements or other material, economic bonds to justify treating them as a unified group. The Court did find that the merger was presumptively subject to entire fairness review. Those who voted for the merger were barred from recovery. The company directors, despite the stockholders' arguments to the contrary, disclosed all material facts in connection with the merger. Thus, the stockholders, who accepted the merger consideration, were barred by the doctrine of acquiescence from challenging the merger's fairness. The other stockholders who did not vote for the merger, but who simply forewent appraisal and accepted the merger consideration, were not barred from recovery.

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