Alabama By-Products Corp. v. Neal

• Decision Date: 15 September 1965
• Docket Number: BY-PRODUCTS
• Parties: ALABAMACORPORATION, and Drummond Company, Inc., as Successor-in-Interest, Respondent/Defendants Below-Appellants, v. Phil H. NEAL, Jr., Phil H. Neal, Jr., Trustee under Trust Instrument Dated
• Court: United States State Supreme Court of Delaware

Page 255

588 A.2d 255

ALABAMA BY-PRODUCTS CORPORATION, and Drummond Company, Inc., as Successor-in-Interest, Respondent/Defendants Below-Appellants, v. Phil H. NEAL, Jr., Phil H. Neal, Jr., Trustee under Trust

Instrument Dated 9/15/65 for the benefit of Samuel Abney,

Britton Neal, Phil Hudson Neal, III, Sarah B. Neal,

McMillan, Ltd., Preston H. Haskell, Wyatt R. Haskell, Wyatt

R. Haskell, Trustee under Trust Agreement dated 10/13/76,

James Robert Hendrix, Henry S. Lynn, Henry Sharp Lynn, Jr.,

Walter E. Shackelford, Henry F. Cleveland, Rucker Agee,

Lawrence Rosen, Berney Perry & Company, Sidney W. Smyer,

Jr., Southtrust Bank of Alabama, N.A., as Co-Trustee, Egger

& Co., Cede & Co., George W. Barber, Jr., Julia W. Barber

Trust for Barber Family, Julia W. Barber Trust for Ludington

Family, Julia W. Barber Trust for Wohle Family, Julia W.

Barber Trust of 1969 for Frederick Ludington Family, J. Pat

Turner, Edward T. Douglas, Jr., Margaret Douglas, Marguerite

D. Caddis, Florence D. Williams, Am South Bank, N.A., as

Trust of Florence Douglas Marital Trust, Am South Bank, N.A.

as Trustee for Florence Douglas Family Trust, and Am South

Bank, N.A. as Trustee for Florence N. Douglas Family Trust

B, Petitioners/Plaintiffs, Below-Appellees.

Supreme Court of Delaware.

Submitted: Feb. 20, 1991.

Decided: March 8, 1991.

Rehearing Denied March 27, 1991.

Upon appeal from Court of Chancery, AFFIRMED.

Robert K. Payson, Arthur L. Dent of Potter, Anderson & Corroon, Wilmington, and Allan M. Pepper (argued), and Aton Arbisser of Kaye, Scholer, Fierman, Hays & Handler, New York City, for appellants.

R. Franklin Balotti, C. Stephen Bigler of Richards, Layton & Finger, Wilmington, and Hobart A. McWhorter, Jr. (argued), and Edward M. Selfe of Bradley, Arant, Rose & White, Birmingham, Ala., for appellees.

Before CHRISTIE, C.J., MOORE and HOLLAND, JJ.

HOLLAND, Justice:

This appeal challenges an appraisal, pursuant to 8 Del.C. § 262, of approximately 120,000 shares of the stock of Alabama By-Products Corporation ("ABC"). Following a short-form merger between ABC and Drummond Holding Corporation ("Drummond") effective August 13, 1985, ABC was absorbed into Drummond. The ABC minority shareholders were cashed-out, pursuant to the merger, and received $75.60 per share. That consideration reflected the $75.00 per share paid to ABC shareholders pursuant to a tender offer less than six months earlier, plus a $.60 quarterly dividend that had been missed in 1985. After a six-day trial, the Court of Chancery issued a fifty-three page opinion which concluded that the fair value of ABC stock on August 13, 1985 was $180.67 per share, and that the petitioners/appellees ("petitioners") were entitled to that amount, with interest thereon at 12.5% per annum from that date until paid.

The appellants/respondents ("respondents") acknowledge that if the Court of Chancery had rejected their contentions with respect to the value of ABC's stock based solely upon the weight of the evidence, there would be little for this Court to review. However, according to the respondents, the Court of Chancery injected an inapposite consideration into the determination of fair value, thereby skewing the statutory appraisal process. Specifically, the respondents contend that the Court of Chancery's reliance on evidence of wrongdoing in the merger, when determining value in a statutory appraisal proceeding, was an error of law that mandates reversal by this Court.

We have carefully reviewed the record in this case. We have concluded that the decision of the Court of Chancery should be affirmed.

An appraisal action is "entirely a creature of statute." Cede & Co. v. Technicolor, Inc., Del.Supr., 542 A.2d 1182, 1186 (1988) (citing Weinberger v. UOP, Inc., Del.Supr., 457 A.2d 701, 714 (1983); Kaye v. Pantone, Inc., Del. Ch., 395 A.2d 369, 374-75 (1978)). It is a limited legislative remedy which is intended to provide shareholders, who dissent from a merger asserting the inadequacy of the offering price, with an independent judicial determination of the fair value of their shares. Id. The governing statute, provides, inter alia, that "the Court shall appraise the shares, determining their fair value exclusive of any element of value arising from the accomplishment or expectation of the merger or consolidation...." 8 Del.C. § 262(h). Accordingly, the value of the appraisal petitioners' shares on the date of the merger is the only litigable issue in a statutory appraisal under Section 262. Cavalier Oil Corp. v. Harnett, Del.Supr., 564 A.2d 1137, 1142 (1989); Cede & Co. v. Technicolor, Inc., 542 A.2d at 1187.

This Court has noted that appraisal may be an inadequate remedy in certain cases "particularly where fraud, misrepresentation, self-dealing, deliberate waste of corporate assets, or gross and palpable overreaching are involved." Cede & Co. v. Technicolor, Inc., 542 A.2d at 1187 (citing Weinberger v. UOP, Inc., 457 A.2d at 714). Nevertheless, this Court has consistently held that "statutory appraisal is limited to 'the payment of the fair value of the shares ... by the surviving or resulting corporation....' " Cede & Co. v. Technicolor, Inc., 542 A.2d at 1189 (citing 8 Del.C. § 262(i)) (emphasis added). Thus, claims for unfair dealing cannot be litigated in the context of a statutory appraisal. Id.

In the case sub judice, there is no dispute that the Court of Chancery properly dismissed the petitioners' claim for unfair dealing, noting that "[t]o authorize the joinder of appraisal and unfair dealing actions as proposed here would result in a hybrid appraisal action, effectively broadening the legislative remedy afforded under [§ 262]." Phil H. Neal, Jr. v. Alabama By-Products Corp., Del. Ch., C.A. No. 8282, slip op. at 10, 1990 WL 109243 Chandler, V.C. (August 1, 1990). However, the Court of Chancery then stated "[i]f corporate fiduciaries engage in self-dealing and fix the merger price by procedures not calculated to yield a fair price, these facts should, and will, be considered in assessing the credibility of the respondent corporations' valuation contentions." Id. at 11 (citing Pinson v. Campbell-Taggart, Inc., Del.Ch., C.A. No. 7499, 1989 WL 17438 Jacobs, V.C. (Feb. 28, 1989, revised, April 21, August 11, and November 8, 1989)). The respondents submit that this statement was contrary to the limited inquiry permitted by Delaware's appraisal statute and provided the improper premise upon which the Court of Chancery mistakenly pursued "an inquiry into the claims of wrongdoing in the merger," when making "a determination of fair value." See Cede & Co. v. Technicolor, Inc., 542 A.2d at 1189.

The respondents' position is that even assuming a factual basis for a finding of unfair dealing, any acts of unfair dealing in the merger process can never be considered in an appraisal proceeding. The respondents, relying upon Cede, argue that such a conclusion follows ipso facto, since "claims" for unfair dealing cannot be litigated in a statutory appraisal proceeding. Thus, according to the respondents, the Court of Chancery erred as a matter of law in this appraisal proceeding when it "considered carefully the record evidence of unfair dealing while assessing the credibility of respondents' valuation contentions." Phil H. Neal, Jr. v. Alabama By-Products Corp., Del.Ch., C.A. No. 8282, slip op. at 11-12.

The petitioners submit that evidence concerning acts of unfair dealing with respect to the merger was introduced, in the case sub judice, for two distinct purposes: first, in support of the unfair dealing claim, and second, to impeach the credibility of appellants' valuation contentions. In fact, the Court of Chancery noted that "[m]uch of the evidence introduced by petitioners to impeach the credibility of respondents' valuation contentions is also offered as support for the unfair dealing claim." Id. at 6. The petitioners argue that after their unfair dealing claim was properly dismissed from the appraisal proceeding, the Court of Chancery was nevertheless entitled to consider the evidence of unfair dealing for the alternate purpose for which it was introduced, i.e., to impeach the respondents' credibility. We agree.

The respondents' argument fails to recognize the distinction between the propriety of considering an act of unfair dealing, which may relate to a party's credibility, and the impropriety of considering an action for unfair dealing in an appraisal proceeding. Although the justiciable issue in an appraisal action is a limited one, the statute specifically provides that "all relevant factors" are to be considered by the Court of Chancery "in determining the fair value" of shares which are subject to appraisal. 8 Del.C. § 262(h); Cavalier Oil Corp. v. Harnett, 564 A.2d at 1142-43; Weinberger v. UOP, Inc., 457 A.2d at 713. There is nothing in the appraisal statute or this Court's prior holdings, including Cede, which suggests that the Court of Chancery may not consider the respondents' conduct at the...