Lynch v. Vickers Energy Corp.

CourtUnited States State Supreme Court of Delaware
Citation429 A.2d 497
PartiesLibby G. LYNCH, Plaintiff, Appellant, v. VICKERS ENERGY CORPORATION, Esmark, Inc., William A. Alexander, Richard J. Boushka, Edward J. Hudson, Donald P. Kelly, Robert D. Phillips, Stormy F. Smith and Jack A. Vickers, Defendants, Appellees.
Decision Date03 April 1981

Upon appeal from the Court of Chancery. Affirmed in part, reversed in part and remanded.

Joseph A. Rosenthal of Morris & Rosenthal, Wilmington, and Sidney B. Silverman (argued), Joan T. Harnes and Martin H. Olesh of Silverman & Harnes, New York City, of counsel, for plaintiff-appellant.

Louis J. Finger of Richards, Layton & Finger, Wilmington, and Leo Herzel, Susan Getzendanner (argued), and Scott J. Davis of Mayer, Brown & Platt, Chicago, Ill., of counsel, for defendants-appellees Vickers Energy Corp., Esmark, Inc., Richard J. Boushka, Donald P. Kelly, Robert D. Phillips and Jack A. Vickers.

David A. Drexler (argued) of Morris, Nichols, Arsht & Tunnell, Wilmington, and William Key Wilde of Bracewell & Patterson, Houston Tex., of counsel, for defendants-appellees William A. Alexander, Edward J. Hudson and Stormy F. Smith.

Before the Court en Banc: HERMANN, C. J., and DUFFY, McNEILLY, QUILLEN and HORSEY, J.

DUFFY, Justice:

This is a class action on behalf of stockholders of TransOcean Oil, Inc. (TransOcean) who sold their shares pursuant to a tender offer by the majority stockholder. 1 The pertinent facts appear in a prior opinion of this Court, Lynch v. Vickers Energy Corp., Del.Supr., 383 A.2d 278 (1977), and in two opinions by the Court of Chancery, 402 A.2d 5 (1979), and 351 A.2d 570 (1976), to which reference is made. We discuss the facts only as necessary for present purposes.


A majority of the issued and outstanding stock of TransOcean is held by defendant Vickers Energy Corporation (Vickers), which is a wholly-owned subsidiary of defendant Esmark, Inc. (Esmark). 2 Vickers had acquired through the tender offer, at $12 each, some 4,228,000 additional shares of TransOcean common.

In the prior appeal, we held that:

"Vickers, as the majority shareholder of TransOcean, owed a fiduciary duty to plaintiff which required 'complete candor' in disclosing fully 'all of the facts and circumstances surrounding the' tender offer."

383 A.2d at 279. And we concluded that the tender offer made by Vickers to its fellow shareholders,

"failed to disclose fully two critical facts: (1) that a 'highly qualified' petroleum engineer ..., who was a member of TransOcean's management, had calculated the net asset value to be worth significantly more than the minimum amount disclosed in the offer; and (2) that Vickers' management had authorized open market purchases of TransOcean's stock during the period immediately preceding the $12 per share tender offer for bids up to $15 per share."

383 A.2d at 280. We then remanded the case for further proceedings in the Court of Chancery consistent with our rulings.

After remand, trial was held on the remaining issues and the Court entered judgment for defendants. 402 A.2d 5 (1979). Plaintiff then docketed this appeal.

In his opinion, the Trial Judge considered several alternative measures of damages or formulas for relief and then, noting the absence of statutory guidelines, he concluded that:

"a proceeding analogous to an appraisal hearing such as is provided for in merger cases is appropriate here, Poole v. N. V. Deli Maatschappij, supra (Del.Supr., 224 A.2d 260 (1966)), in a situation in which active fraud has not been alleged or proved."

402 A.2d at 11. The Court then weighed and applied the several factors relevant to fixing the "fair" or "proper" value of shares in a statutory appraisal proceeding, 8 Del.C. § 262. See, e. g., Universal City Studios, Inc. v. Francis I. duPont & Co., Del.Supr., 334 A.2d 216 (1975). Those factors are the value of the corporate assets, the market value of the stock and its earnings value. The Trial Judge then adjusted and summarized his findings of the value of each TransOcean share, as of the time of the tender offer, as follows:

                "Asset value     $ 17.50 x 40%  $  7.00
                 Market value    $  9.48 x 40%  $  3.80
                 Earnings value  $  5.25 x 20%  $  1.05
                 Total                          $ 11.85"

402 A.2d at 12.

Since members of the class had been paid $12 per share for the TransOcean stock which they sold to Vickers, the Court concluded that plaintiff had not been damaged by defendants' failure to disclose the material facts, which was the basis of our reversal following the prior appeal. See 383 A.2d at 282.

In this Court, plaintiff argues that the Trial Judge erroneously interpreted and applied our decision on the first appeal; that uncontroverted trial testimony fixed the value of the TransOcean shares to Esmark at up to $40 per share; that the Chancellor committed error in valuing and weighing TransOcean's net assets; and that he erroneously refused to order rescission.

Defendants respond by saying, among other things, that the Court of Chancery used the correct standard in determining whether plaintiff had been damaged by the failure to disclose the material facts; that the Court correctly applied that standard to the evidence; that the members of the class had been overpaid for the TransOcean shares; that plaintiff must show injury in order to be entitled to a remedy; and that rescission would be unwarranted in any event.


As we see the controversy in context following our ruling on the first appeal, the issue remaining for decision is very narrow. In ultimate terms, it amounts to this: Is plaintiff entitled to relief and, if so, what is it to be?

The choice of relief to be accorded a prevailing plaintiff in equity is largely a matter of discretion with the Chancellor, 1 Pomeroy's Equity Jurisprudence (5 ed.) § 109, and Delaware, with its long history of common law equity jurisprudence, has followed that tradition. Cf. Wilmont Homes, Inc. v. Weiler, Del.Supr., 202 A.2d 576 (1964). Here, however, there is more to the appeal than merely testing for abuse of discretion. As we view it, the issue is not the manner in which the Court applied an agreed or undisputed measure of damages, but whether the Court followed a proper rule of law in deciding whether the members of plaintiff's class are entitled to relief.

We conclude that reversal is required because the Chancellor erroneously relied on the Poole case and on an appraisal formula (which has been developed in our case law under the Statute, 8 Del.C. § 262) in determining whether relief should be granted. In short, the case calls for a different rule of law on damages than the one which the Chancellor applied.


In Poole, the question raised was the measure of damages to be applied in an action for inducing a sale of stock by fraudulent misrepresentation. While the corporate defendant in that case (like Vickers in this case) held more than 50% of the stock in the corporation whose shares were acquired from the plaintiffs, Poole was tried as a misrepresentation case in which the nature of the relief sought was significant and, as to that, this Court said:

"(P)laintiffs seek to recover the difference between the actual value of the stock and the price paid, known as the 'out-of-pocket' measure of damages ...."

224 A.2d at 262. Indeed, the relief sought by plaintiffs was determinative because the Court, after noting other measures of damages, said:

"In any event, since the plaintiffs' action is grounded upon the out-of-pocket measure of damages, that is the rule to be applied."

224 A.2d at 262.

Clearly, then, Poole was pleaded and tried as a fraud case in which the Court limited plaintiffs to the out-of-pocket measure of damages on which they had gone to trial, 224 A.2d at 262, and then applied the general rule used in determining the "actual value of stock" involved in a fraud case. 3 In so doing, the Court used a corporate "going concern" basis and rejected a claim that a "liquidation" basis was appropriate. 224 A.2d at 263.

The question, then, is whether the Poole approach should be applied here. We think not, for at least one significant reason: a breach of fiduciary duty was alleged in this litigation and it was found by this Court, 383 A.2d at 281, but such a claim was neither charged nor found in Poole. Given that distinction, we are not persuaded that plaintiff and the members of her class should be limited to the measure of damages which the plaintiffs had pleaded and tried in Poole and which the Chancellor applied here.

A rule derived from a case in which the Court accepted a damage formula for which the plaintiffs had specifically asked, may not, in fairness, be applied to limit the present plaintiff whose claim is based, not on a similar cause of action nor on the same damage formula, but on the violation of a different standard of conduct. The difference is important because the appraisal approach adopted in Poole has a built-in limitation, namely, gain to the corporation resulting from a statutory merger is not a factor which is included in determining the value of the shares, and it was not considered by the Chancellor. But that limitation does not apply when a fiduciary has breached a duty to those to whom it is owed.

We do not overrule Poole, which remains appropriate for an action based on misrepresentation. But a claim founded on a breach of fiduciary duty permits a different form of relief, that is, an accounting or rescission or other remedy afforded for breach of trust by a fiduciary.


We now consider what relief is appropriate. Plaintiff has prayed for both rescission and money damages and the theory of the claim asserted would support a judgment in either form. Thus rescission would restore the parties to the status quo before sales of the shares were made, and money damages for non-disclosure of information germane to the transactions is akin to a legally based action for...

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