ENSTAR Corp., Matter of

• Decision Date: 24 March 1992
• Citation: 604 A.2d 404
• Parties: In the Matter of the Appraisal of ENSTAR CORPORATION.
• Court: Supreme Court of Delaware

Page 404

604 A.2d 404

In the Matter of the Appraisal of ENSTAR CORPORATION.

Supreme Court of Delaware.

Submitted Dec. 17, 1991.

Decided March 5, 1992.

Rehearing Denied March 24, 1992.

Upon appeal from the Court of Chancery. REVERSED.

A. Gilchrist Sparks, III (argued), and David G. Thunhorst of Morris, Nichols, Arsht & Tunnell, Wilmington, for appellant.

Grover C. Brown (argued) of Morris, James Hitchens & Williams, Wilmington, Jay Cohen of Paul, Weiss, Rifkind, Wharton & Garrison, New York City, of counsel, for appellees.

Before HORSEY, MOORE and HOLLAND, JJ.

HOLLAND, Justice:

This is an appeal by the respondent-appellant, ENSTAR Corporation ("ENSTAR"), from a final judgment of the Court of Chancery. The Court of Chancery concluded that a settlement agreement between ENSTAR and the petitioners-appellees, Marc Belzberg, Abraham Farbstein, First City Financial Corp. Ltd., and First City Trust Company (collectively the "Belzbergs"), was specifically enforceable. In re ENSTAR Corp., Del.Ch., 593 A.2d 543 (1991). The Belzbergs have filed a cross-appeal from that portion of the Court of Chancery's decision which denied their application for attorneys fees.

In this appeal, ENSTAR has raised four contentions. Its first contention is that the Court of Chancery erred by specifically enforcing an agreement, the material terms of which were never agreed upon by the parties. ENSTAR's second contention is that, even assuming that an enforceable agreement was created on January 17, 1986, the Court of Chancery erred in determining that the parties' mutual mistake of fact regarding the Belzbergs' receipt of the merger consideration was not material and, therefore, did not entitle ENSTAR to rescind the agreement. Third, ENSTAR contends that the Court of Chancery erred in determining that the Belzbergs' misrepresentations regarding their receipt of the merger consideration did not permit ENSTAR to void the settlement agreement. Finally, ENSTAR asserts that the Court of Chancery erred in finding that ENSTAR's attorney's mistaken belief that the Belzbergs had never exchanged their shares for merger consideration was not grounds for the rescission of the agreement.

In its cross-appeal, the Belzbergs assert that the Court of Chancery erred by failing to require ENSTAR to pay the Belzbergs' attorneys fees. The Belzbergs argue that this was a term of the January 17, 1986 settlement agreement. Alternatively, the Belzbergs argue that attorneys fees should have been awarded to them when they prevailed in enforcing the settlement agreement.

We have concluded that the settlement agreement "specifically enforced" by the Court of Chancery was not the agreement which had been reached by the parties on January 17, 1986. In fact, the record reflects that the material terms of the settlement agreement imposed upon the parties by the Court of Chancery were never even discussed by them. Therefore, the judgment of the Court of Chancery, purporting to "specifically enforce" the settlement agreement of January 17, 1986, is reversed. The judgment of the Court of Chancery denying the Belzbergs' application for attorneys fees is moot.

Facts

On September 4, 1984, ENSTAR mailed a proxy statement in connection with a special stockholders meeting to be held on September 25, 1984. The purpose of the special meeting was to have the stockholders consider and act upon the proposed merger of Unimar Subsidiary, Inc. with and into ENSTAR. Pursuant to the terms of the proposed merger, each ENSTAR share would be converted into the right to receive $2 in cash and one Indonesian Participating Unit ("IPU").¹

When the proxy statement was mailed, the Belzbergs were the beneficial owners of 156,828 shares of ENSTAR stock. However, the Belzbergs were not the record owners of any shares of ENSTAR stock. The Belzbergs held their stock in several layers of nominee names. A majority of the Belzbergs' shares were held by Chemical Bank, which in turn held the shares through the Depository Trust Company and its nominee, Cede & Co. ("Cede").

After receiving notification of the merger, the Belzbergs apparently decided to exercise their statutory right to seek an appraisal of their shares rather than accept the merger consideration. At the request of the Belzbergs, Robi Blumenstein ("Blumenstein") of First City Capital mailed a "demand" letter to ENSTAR on Friday, September 21, 1984. The Belzbergs acknowledge that Blumenstein's letter stated, incorrectly, that First City Financial Corp., First City Trust Company, Marc Belzberg and Abraham Farbstein "are each registered stockholders of ENSTAR."

On Monday, September 24, Blumenstein received a telephone call from Pat Dyer, the General Counsel and Secretary of ENSTAR, informing Blumenstein that the September 21, 1984 demand letter was defective. Dyer informed Blumenstein that ENSTAR considered the demand defective because it failed to specify the number of shares for which appraisal was being sought and because the persons named in the demand letter were not stockholders of record. After speaking with Dyer, Blumenstein sent an amended demand letter to ENSTAR identifying Cede as the registered owner of 156,828 shares of ENSTAR stock owned beneficially by the Belzbergs. Blumenstein's amended demand letter of September 24, 1984 to ENSTAR did not explicitly state that he was making the demand on behalf of Cede.

On September 25, 1984, the proposed merger was approved at the special stockholders meeting and Unimar Subsidiary, Inc. was merged with and into ENSTAR.² The Belzbergs never notified their nominee that their shares should not be exchanged for the merger consideration. In October of 1984, the stock owned beneficially by the Belzbergs was submitted by their nominee, Cede, in exchange for the merger consideration. On October 17 and 18, 1984, the Belzbergs' nominee accounts were credited with 156,828 IPUs (with an approximate value at the time of $1.72 million) and $313,656 in cash. Thus, in October of 1984, the Belzbergs' nominee accounts reflected the Belzbergs' receipt of the merger consideration, having an aggregate value to them of approximately $2.03 million.

In late October or early November, 1984, Blumenstein learned that ENSTAR had paid the merger consideration to the Belzbergs' nominee accounts. Blumenstein promptly contacted the Belzbergs' New York counsel, Richard Borisoff ("Borisoff") of Paul, Weiss, Rifkind, Wharton & Garrison. The purpose of Blumenstein's contact was to ascertain the legal implications of the receipt of the merger consideration on the Belzbergs' demand for appraisal. Borisoff consulted James Burnett ("Burnett") of Potter, Anderson & Corroon, the Belzbergs' Delaware counsel. The Belzbergs' Delaware counsel advised Borisoff that the surrender of the ENSTAR shares and the receipt of the merger consideration might give ENSTAR an additional defense in the appraisal action. After consulting with their attorneys, the Belzbergs took no action to reverse the transaction in which their ENSTAR shares had been exchanged by their nominees for the merger consideration.

Many of ENSTAR's stockholders had exercised their statutory rights and demanded an appraisal of their shares in lieu of receiving the merger consideration. After the commencement of the consolidated appraisal action, ENSTAR filed a motion in the Court of Chancery for an order requiring, inter alia, that all claimants in the appraisal action file their stock certificates with the court. On April 16, 1985, the Court of Chancery instead determined that ENSTAR should be required to file a stockholder information form with respect to each shareholder seeking appraisal. The Court also directed ENSTAR to set forth in the stockholder information forms all objections that ENSTAR intended to interpose with respect to each of the appraisal claimants.

On June 11, 1985, ENSTAR filed stockholder information forms with the Register in Chancery. With respect to the Belzbergs, ENSTAR asserted that the Belzbergs' demands for appraisal were defective in that they were not made by or on behalf of a stockholder of record. On July 24, 1985, the Belzbergs executed the stockholder information forms filed by ENSTAR. In response to the objection raised by ENSTAR, the Belzbergs asserted reasons why the failure of the demand to be executed by or on behalf of the record holder should be excused.

On January 11, 1986, Blumenstein received a telephone call from another appraisal claimant who informed him that a settlement of the appraisal action was about to be proposed by ENSTAR. On January 15, 1986, the attorneys for the principal parties to the appraisal proceeding met in Wilmington to attempt to negotiate a settlement of the appraisal action. ENSTAR was represented by their Delaware counsel, Charles F. Richards, Jr. ("Richards") of Richards, Layton & Finger. One of the other attorneys who was present during those settlement negotiations was Burnett, because Potter, Anderson & Corroon represented several claimants in the appraisal action, including the Belzbergs.

On Thursday, January 16, the attorneys reached an agreement on the terms of a settlement, subject to entering into a written agreement ("Group Settlement Agreement"). The proposed settlement provided that ENSTAR would pay $20 per share, plus interest and attorneys fees, for all shares which ENSTAR did not contest were entitled to appraisal. Claimants whose rights to seek appraisal were challenged by ENSTAR, such as the Belzbergs, would receive the settlement consideration if the Court of Chancery later determined that their shares were entitled to appraisal.

Borisoff was advised of the proposed settlement by Potter, Anderson & Corroon on January 16, 1986. That same day, the Belzbergs rejected the proposed settlement. The next day, January 17, Potter, Anderson & Corroon withdrew as Delaware counsel for the Belzbergs because they represented other clients who supported the settlement. Borisoff...