Gholl V. Emachines: Creating Predictability and Consistency in Appraisal Actions

Summary

---

As is often the case in short-form mergers, shareholders believe that the merger consideration offered to them by the company is inadequate. As a result, disgruntled shareholders are permitted, if they refrain from accepting the merger consideration, to seek appraisal in the Delaware Court of Chancery under title 8, section 262 of the Delaware Code. In Gholl V. eMachines Inc, the Delaware Court of Chancery appeared to derive at least four factors within its "all relevant factors" analysis, which, if not complied with by the directors, may be used by the court under its "all relevant factors" analysis to increase the fair value of the corporation's common stock in favor of dissenting shareholders. The Delaware Court of Chancery, in eMachines, took the first step in implementing factors that directors should comply with if they expect the court to use their fair value determination.

See the full content of this document

Extract

---

Gholl V. Emachines: Creating Predictability and Consistency in Appraisal Actions

I. INTRODUCTION .................... 197

II. BACKGROUND ..................... 199

A. Developing Delaware Corporate Law.................... 199

B. The Appraisal Framework.................... 201

1. Statutory Authority for Appraisal Actions....................... 201

2. Burden of Parties in an Appraisal Action........................ 202

3. Resort to the Court's Discretion........................ 202

4. Determining Fair Value......................... 202

C. The Need for Consistency and Predictability In Appraisal Actions................... 202

D. Gholl v. eMachines..................... 203

III. ANALYSIS ......................... 205

A. Competitive and Fair Auction .................... 206

B. Timing ofPurchase....................207

C. Disclosure of Relevant Information to Investment Bank, Outside Bidders, and shareholders....................208

D. Sophisticated Independent Directors..................... 210

IV. RECOMMENDATION ...................... 211

A. Proposed Changes to Appraisal Actions.................... 212

B. Benefits of Proposed Changes....................213

C. Consistency of Proposed Changes with Classman v. Unocal and Current Delaware case Law.................... 214

V. CONCLUSION.................... 215

I. INTRODUCTION

As is often the case in short-form mergers, shareholders believe that the merger consideration offered to them by the company is inadequate. As a result, disgruntled shareholders are permitted, if they refrain from accepting the merger consideration, to seek appraisal1 in the Delaware Court of Chancery under title 8, section 262 of the Delaware Code.2 In seeking appraisal, shareholders attempt to convince the court that the consideration offered in the merger was too low and, therefore, that they were not offered fair value. Conversely, the company, through its own experts, attempts to demonstrate that the consideration offered to shareholders in the merger was more than adequate, and as a result, that the shareholders should receive an amount equal to or less than the merger consideration. If neither party meets its burden, the court will decide the fair value of the company's common stock as of the merger date.

The rather condensed explanation of short-form appraisal actions listed above may give the false impression that appraisal actions are relatively easy for the Delaware Court of Chancery to decide. In actuality, actions for appraisal substantially involve the use of financial experts, models, assumptio...

See the full content of this document

---