Krieger v. Wesco Financial Corp..

• Decision Date: 13 October 2011
• Docket Number: CA. No. 6176–VCL.
• Citation: 30 A.3d 54
• Parties: Joel KRIEGER, Individually and on Behalf of All Others Similarly Situated, Plaintiff,v.WESCO FINANCIAL CORPORATION, Charles T. Munger, Elizabeth Caspers Peters, Carolyn H. Carlburg, Robert E. Denham, Robert T. Flaherty, Peter D. Kaufman, Berkshire Hathaway, Inc. and Montana Acquisitions, LLC, Defendants.
• Court: Court of Chancery of Delaware

30 A.3d 54

Joel KRIEGER, Individually and on Behalf of All Others Similarly Situated, Plaintiff,

v.WESCO FINANCIAL CORPORATION, Charles T. Munger, Elizabeth Caspers Peters, Carolyn H. Carlburg, Robert E. Denham, Robert T. Flaherty, Peter D. Kaufman, Berkshire Hathaway, Inc. and Montana Acquisitions, LLC, Defendants.

CA. No. 6176–VCL.

Court of Chancery of Delaware.

Submitted: Oct. 4, 2011.Decided: Oct. 13, 2011.

James C. Strum, Faruqi & Faruqi, LLP, Wilmington, Delaware; Juan E. Monteverde, Emily C. Komlossy, Richard W. Gonnello, Nicholas W. Moyne, Faruqi & Faruqi, LLP, New York, New York; Attorneys for Plaintiff.William M. Lafferty, Shannon E. German, Ryan J. Greecher, Morris, Nichols, Arsht & Tunnell LLP, Wilmington, Delaware; George M. Garvey, Munger, Tolles & Olson LLP, Los Angeles, California; Attorneys for Defendants Charles T. Munger, Robert E. Denham, Berkshire Hathaway Inc., and Montana Acquisitions, LLC.Edward P. Welch, Joseph O. Larkin, Sarah Runnells Martin, Skadden, Arps, Slate, Meagher & Flom LLP, Wilmington, Delaware; Eric S. Waxman, Lance A. Etcheverry, Skadden, Arps, Slate, Meagher & Flom LLP, Los Angeles, California; Attorneys for Defendants Elizabeth Caspers Peters, Carolyn H. Carlburg, and Robert T. Flaherty.Danielle Gibbs, Nicholas J. Rohrer, Young Conaway Stargatt & Taylor LLP, Wilmington, Delaware; Attorneys for Defendants Wesco Financial Corporation and Peter D. Kaufman.

OPINION

LASTER, Vice Chancellor.

The plaintiff contends that holders of common stock of Wesco Financial Corporation were entitled to appraisal rights under Section 262 of the General Corporation Law, 8 Del. C. § 262, in connection with a forward triangular merger among Wesco, its parent Berkshire Hathaway Inc., and Montana Acquisitions, LLC, a Berkshire acquisition subsidiary. Under the merger agreement, Wesco's minority stockholders could elect to receive merger consideration in the form of (i) cash, (ii) publicly traded shares of the acquirer, or (iii) a mix of cash and publicly traded shares. Stockholders who failed to make an election received cash, and stockholders electing stock consideration received cash in lieu of fractional shares. The parties have cross-moved for partial summary judgment on the availability of appraisal rights, and the material facts are undisputed. Because Wesco common stockholders were not required to accept consideration other than stock listed on a national securities exchange and cash in lieu of fractional shares, they were not entitled to appraisal rights. Accordingly, summary judgment on this issue is entered in favor of the defendants.

I. FACTUAL BACKGROUND

Wesco is a Delaware corporation that operates in the insurance, furniture rental, and steel service center businesses. Before the merger, Wesco's common stock traded on NYSE Amex. Berkshire indirectly owned 80.1% of Wesco's outstanding common stock.

On February 4, 2011, Wesco and Berkshire entered into a merger agreement pursuant to which Wesco would merge into Montana Acquisitions, LLC, an indirect wholly owned subsidiary of Berkshire. Pursuant to the merger agreement, Wesco's minority stockholders could elect to have their shares converted into the right to receive approximately $385 per share in cash, an equivalent value in publicly traded shares of Berkshire Class B common stock, or a combination of cash and publicly traded shares. Stockholders who did not make an election would receive cash. The number of shares that Berkshire would issue was not capped or otherwise subject to proration, and Berkshire had sufficient authorized shares to issue the merger consideration even if all Wesco stockholders elected stock.

The proxy statement for the merger explained that holders of Wesco's common stock would not be entitled to appraisal rights.

Under Delaware law, appraisal rights are only available if, among other things, shareholders are required to accept cash for their shares (other than cash in lieu of fractional shares). Given that the Wesco shareholders may elect to receive cash or Berkshire Class B common stock, or a combination of cash and Berkshire Class B common stock, in exchange for their shares of Wesco common stock, Wesco and Berkshire do not believe that Wesco shareholders will have any appraisal rights with [ ] respect to the shares of Wesco common stock they hold in connection with the merger.

Wesco Definitive Proxy Statement dated May 18, 2011 at 55.

Under the merger agreement, stockholders could submit an election form specifying the type of consideration that they wished to receive. The election form and the proxy for voting on the merger were separate documents. The election form was due two business days before the special meeting held to consider the merger. The proxy was due prior to the vote on the merger, or stockholders could appear at the special meeting and vote in person. Holders of 539,613 Wesco shares elected to receive cash, holders of 624,921 Wesco shares elected to receive Berkshire stock, and holders of 232,356 Wesco shares did not make an election. At the special meeting, Wesco's stockholders approved the merger. No Wesco stockholder demanded appraisal.

Joel Krieger, the plaintiff, owned 10 shares of Wesco common stock. He filed this action on February 8, 2011, the day after the merger announcement, then moved for a preliminary injunction. Krieger argued, among other things, that the merger should be enjoined because stockholders were entitled to appraisal rights and because the disclosures regarding appraisal rights in the proxy statement were false and misleading. I denied the injunction application on May 10, 2011. The parties subsequently cross-moved for partial summary judgment as to the availability of appraisal rights.

II. LEGAL ANALYSIS

Summary judgment is appropriate if the moving party demonstrates that there is “no genuine issue as to any material fact” and that it is “entitled to a judgment as a matter of law.” Ct. Ch. R. 56(c). “Where the parties have filed cross motions for summary judgment and have not presented argument to the Court that there is an issue of fact material to the disposition of either motion, the Court shall deem the motions to be the equivalent of a stipulation for decision on the merits based on the record submitted with the motions.” Ct. Ch. R. 56(h). The facts material to whether Wesco stockholders have appraisal rights are not in dispute, making the issue “ripe for summary judgment.” Gilbert v. El Paso Co., 575 A.2d 1131, 1142 (Del.1990).

Section 262(b) sets forth the general principle that “[a]ppraisal rights shall be available for the shares of any class or series of stock of a constituent corporation in a merger or consolidation” effected pursuant to certain enumerated sections of General Corporation Law. 8 Del. C. § 262(b). The enumerated sections include Section 264 of the General Corporation Law, 8 Del. C. § 264, pursuant to which the Wesco–Berkshire merger was effected. As a starting point, therefore, Wesco stockholders would be entitled to appraisal rights under Section 262(b).

The next step in the appraisal rights analysis focuses on Section 262(b)(1). Notwithstanding the general availability of appraisal rights for mergers effected pursuant to the sections enumerated in Section 262(b), Section 262(b)(1) creates the “market-out” exception. Under this exception,

no appraisal rights under this section shall be available for the shares of any class or series of stock, which stock ... at the record date fixed to determine the stockholders entitled to receive notice of the meeting of stockholders to act upon the agreement of merger or consolidation, [was] either (i) listed on a national securities exchange or (ii) held of record by more than 2,000 holders....

8 Del. C. § 262(b)(1). Wesco's common stock was listed on a national securities exchange before the merger, so at this point in the analysis, Wesco's stockholders would not be entitled to appraisal rights.

But the appraisal statute continues. In what is known affectionately as the “exception to the exception,” Section 262(b)(2) restores appraisal rights to a class or series of stock otherwise covered by the market-out exception if the holders are required to accept certain types of consideration.

(2) Notwithstanding paragraph (1) of this subsection, appraisal rights under this section shall be available for the shares of any class or series of stock of a constituent corporation if the holders thereof are required by the terms of an agreement of merger or consolidation ... to accept for such stock anything except:

a. Shares of stock of the corporation surviving or resulting from such merger or consolidation ...;

b. Shares of stock of any other corporation ... which shares of stock ... at the effective date of the merger or consolidation will be either listed on a national securities exchange or held of record by more than 2,000 holders;

c. Cash in lieu of fractional shares ...; or

d. Any combination of the shares of stock ... and cash in lieu of fractional shares ... described in the foregoing subparagraphs a., b. and c. of this paragraph.

8 Del. C. § 262(b)(2); see 2 Edward P. Welch et al., Folk on the Delaware General Corporation Law § 262.2.3, at GCL–IX–228 (5th ed. 2006) (“Section 262(b)(2) ... provid[es] an exception to the exception, thereby restoring appraisal rights in certain circumstances.”). As noted, Wesco stockholders could elect to receive (i) cash, (ii) shares of Berkshire Class B common stock listed on a national securities exchange, or (iii) a mix of cash and shares. Wesco stockholders who opted for Berkshire Class B shares would receive cash in lieu of fractional shares.

Under the terms of the merger agreement, holders of the class of Wesco common stock were not “required” to accept any type of consideration that would restore appraisal rights under the “exception to the exception.” Berkshire had sufficient authorized shares of Berkshire Class B common stock and...