In re Pure Res. S'holders Litig. - 808 A.2d 421 (Del. Ch. 2002)

Rule:

Delaware law should consider an acquisition tender offer by a controlling stockholder non-coercive only when: (1) it is subject to a non-waivable majority of the minority tender condition; (2) the controlling stockholder promises to consummate a prompt Del. Code Ann. tit. 8, § 253 merger at the same price if it obtains more than 90 percent of the shares; and (3) the controlling stockholder has made no retributive threats. Those protections minimize the distorting influence of the tendering process on voluntary choice. They also recognize the adverse conditions that confront stockholders who find themselves owning what have become very thinly traded shares. These conditions also provide a partial cure to the disaggregation problem, by providing a realistic non-tendering goal the minority can achieve to prevent the offer from proceeding altogether.

Facts:

Plaintiff minority shareholders sought to enjoin a pending exchange offer by which defendant corporation, the majority shareholder, hoped to acquire the rest of the shares of the company at issue by exchanging shares of its own stock. The minority shareholders contended that the offer was inadequate and was subject to entire fairness review consistent with the rationale of Kahn v. Lynch Communication Systems, Inc. and its progeny. Plaintiff further contended that the defendants have not made adequate and non-misleading disclosure of the material facts necessary for the corporation’s stockholders to make an informed decision whether to tender into the Offer. In its defense, the defendants alleged that the Offer was a non-coercive one that was accompanied by complete disclosure of all material facts. As such, the Offer was not subject to the entire fairness standard, but to the standards set forth in cases like Solomon v. Pathe Communications Corp.

Issue:

Was the Offer subject to the entire fairness standard?

Answer:

No.

Conclusion:

The court held that the Offer was subject, as a general matter, to the Solomon standards, rather than the Lynch entire fairness standard. The court, however, held that many of the concerns that justified the Lynch standard were implicated by tender offers initiated by controlling stockholders, which had as their goal the acquisition of the rest of the subsidiary's shares. According to the court, the concerns should be accommodated within the Solomon form of review, by requiring that tender offers by controlling shareholders be structured in a manner that would reduce the distorting effect of the tendering process on free stockholder choice and by ensuring minority stockholders a candid and unfettered tendering recommendation from the independent directors of the target board. In its present form, however, the court concluded that the Offer must be preliminarily enjoined because material information relevant to the stockholders’ decision-making process has not been fairly disclosed.