Enacted in 1899 to replace the mandate that consolidations receive unanimous shareholder approval,1 section 262 of the Delaware General Corporation Law2 provides dissenting investors of merger targets with “appraisal rights” that entitle them to a judicially determined valuation of their shares.3 Once a “sleepy backwater” of corporate law,4 the statute has received growing attention as it has become an increasingly vital safeguard against director exploitation.5 Despite appraisal’s “disciplinary effect,”6 the Delaware Supreme Court has lately reined in the doctrine’s potency with decisions enforcing contractual waivers of such rights7 and limiting valuations to the transaction’s price.8 In In re GGP, Inc. Stockholder Litigation,9 the court further clarified the statute by applying it to a novel merger providing a substantial “pre-closing dividend” conditional on the deal’s success.10 While the shareholders prevailed,11 the narrow survival of the motion to dismiss with unanswered concerns in the dissent raises doubts about the longevity of appraisals.
In 2017, mall operator GGP, Inc. (GGP) entered strategic merger negotiations with real estate company Brookfield Property Partners, L.P. (Brookfield).12 During these parties’ correspondence, Brookfield insisted the agreement include an “appraisal rights closing condition” that would have permitted it to terminate the deal if a certain number of shares exercised appraisal rights.13 But GGP rejected these requests, and the parties eventually reached a proposal (later approved by 94% of votes unrelated to Brookfield14) offering $23.50 per share without the clause.15 Importantly, in its 344-page proxy statement, GGP disclosed Brookfield would conduct its acquisition through a “pre-closing dividend” — forming 98.5% of the deal price16 — followed by a trivial “per share merger consideration” shortly thereafter.17 The proxy cautioned that shareholders were “entitled to exercise appraisal rights solely in connection with the merger”18 and contained a section titled “Appraisal Rights in the Merger”19 (Appraisal Rights Notice) stating the following:
If the [merger is] completed, GGP common stockholders who comply exactly with the applicable requirements and procedures of Section 262 . . . will be entitled to demand appraisal of their GGP common stock and receive in lieu of the per share merger consideration a cash payment equal to the “fair value” of their GGP common stock . . . . [A]ppraised value may be greater than, the same as or less than the per share merger consideration.20
Taking issue with the italicized language,21 several shareholders sued Brookfield and various GGP leaders in the Delaware Chancery Court,22 claiming the defendants designed “a contrived scheme to dissuade [plaintiffs] from exercising appraisal,” as investors could seemingly seek “only 1.5% of the [total merger] consideration.”23 They accordingly alleged the defendants breached their fiduciary duty by either “failing to provide . . . a fair summary of” such rights or “intentional[ly] thwarting” them altogether.24
Writing for the court, Vice Chancellor Slights stated he could consider the preclosing dividend as a “relevant factor” in his appraisal25 and conceded the proxy “could have been more clearly drafted.”26 Nevertheless, since the Appraisal Rights Notice encouraged investors to seek counsel and “reflect[ed] the unremarkable observation that . . . the court’s adjudicated valuation is difficult to predict,” he held the proxy properly disclosed appraisal rights and dismissed the claim.27
The Delaware Supreme Court reversed in relevant part.28 Writing for the majority, Justice Traynor29 first recounted that the court cannot affirm a dismissal if the plaintiff would “be entitled to recover under any reasonably conceivable set of circumstances.”30 Emphasizing that the Court of Chancery must conduct appraisals by estimating “the value of the corporation at the time of the merger as if it had not occurred,”31 the court concluded a proper valuation should include the preclosing dividend, as this payment was conditioned on the merger’s approval.32 And although acceptance of merger consideration normally constitutes a forfeiture of the shareholder’s appraisal right,33 the plaintiffs did not waive this power by receiving the mandatory preclosing dividend.34
Justice Traynor next reiterated that corporate directors must “disclose fully and fairly all material information,”35 which Delaware courts define as information raising “a substantial likelihood that a reasonable stockholder would consider it important in deciding how to vote.”36 Analyzing the Appraisal Rights Notice, he labeled the disclosure “misleading,” as it “explicitly correlated” the fair value of investors’ shares with just the per-share merger consideration and suggested the pre-closing dividend would be excluded.37 Justice Traynor then deemed such misinformation material because it obfuscated GGP’s valuation to shareholders and conceivably caused some to believe they could not qualify for appraisal under a de minimis exception in Delaware law.38
Addressing the defendants’ assertion that they need not share “speculat[ion] about how a court might decide hypothetical legal issues,”39 the court held the proxy already contained legal advice through its Appraisal Rights Notice and was thereby “required to be correct and complete” in such disclosures.40 Finally, given Brookfield’s earlier attempts to include an appraisal-rights closing condition and the defendants’ failure to supply an alternative justification for their transaction’s structure, Justice Traynor found sufficient evidence of such misleading information being intentional for the plaintiffs’ claims to survive dismissal.41
Dissenting in part, Justice Montgomery-Reeves42 agreed with both treating the preclosing dividend as merger consideration and concluding that the receipt of such payment did not waive appraisal rights.43 However, stressing that omitted facts “must contribute meaningfully to the ‘total mix’ of information available” to be material,44 she took issue with Justice Traynor labeling the proxy “misleading” for three reasons.45 First, the Appraisal Rights Notice explicitly mentioned just the per-share merger consideration because it “accurately reflect[ed]” that shareholders need not forgo the preclosing dividend to exercise appraisal.46 Second, other disclosures in the proxy expressly considered this dividend part of the transaction’s total consideration,47 thereby adequately asserting the payment was “‘in connection with’ the merger.”48 Lastly, considering the clarity in Delaware’s laws on appraisal rights49 and the plaintiffs’ compelling argument that the proxy elsewhere included the preclosing dividend in merger consideration, shareholders could not reasonably conclude that an appraisal would exclude such a distribution.50 Justice Montgomery-Reeves ended by stating that, even if the proxy misguided some investors into believing they fell within Delaware’s de minimis exception, the plaintiffs waived such an argument by failing to specifically raise it in their complaint to the Chancery Court.51 Consequently, she would have affirmed the dismissal of their claims.52
In re GGP seemingly involved fact-specific debates over a novel merger inconsequential to corporate law overall, but its wanting defense of appraisal rights more broadly signaled the doctrine’s waning protection against exploitative consolidations. Just one vote shy of a majority,53 the dissent sought to reject such rights through narrow interpretations of the proxy and overconfidence in investors’ legal expertise. Combined with the court’s enforcement of appraisal-rights waivers54 and tendency to center valuations around the transaction’s price,55 the dissent would introduce another avenue to curtail the doctrine with misleading disclosures — further threatening this safeguard for minority shareholders.56
The dissent first misapplied Delaware’s “reasonably conceivable” pleading standard by finding undue clarity in the proxy. Beginning with the Appraisal Rights Notice, the dissent correctly interpreted this section’s first mention of the per-share merger consideration to describe an exception in Delaware’s appraisal-waiver law.57 But this reading does not extend to the proxy’s later statement that “appraised value may be greater than, the same as or less than the per share merger consideration.”58 Although shareholders need only forgo the per-share merger consideration to qualify for appraisal, the correct reference frame for the appraised value should include the preclosing dividend.59 Additionally, regarding the dissent’s finding that the proxy elsewhere implied the preclosing dividend was “in connection with the merger,”60 this construal does not eliminate other feasible interpretations.61 Indeed, one need look no further than the proxy’s defined terms as shareholders could have inferred “per share merger consideration”62 to include all payments “in connection with the merger,”63 implying excluded disbursements — such as the preclosing dividend — would be left out. From this phrase and the Appraisal Rights Notice, it is “reasonably conceiv-able” the proxy misled investors into thinking the preclosing dividend would not be considered in a valuation. But according to the dissent, shareholders should have easily been able to eliminate such confusion by relying on the proxy’s limited accurate portrayals in its 344 pages of information.64
The dissent then transcended the defendants’ communications to assert that alternative interpretations of shareholders’ appraisal rights were not reasonably conceivable because of the sufficient clarity in Delaware’s statute and precedent — a conclusion striking for several reasons. First, the dissent found that prior cases unquestionably extended to, and overwhelmingly supported, the preclosing dividend’s inclusion in an appraisal even though the court had never before addressed this matter.65 The dissent next took issue with the plaintiffs’ “convincing[] argu[ment] that the [p]re-[c]losing [d]ividend is merger consideration” because it inherently contradicted their simultaneous assertion that the proxy was misleading.66 However, such claims are not mutually exclusive; on one hand, shareholders can advocate for the preclosing dividend’s inclusion in an appraisal by leveraging Delaware law and some of the proxy’s text while, on the other, arguing the defendants muddied this realization in other conveyances.67 But above all, when taken to its extreme, the dissent’s logic would render the proxy’s required appraisal-rights disclosures irrelevant altogether. If the court can expect shareholders to recognize when Delaware law would override a corporation’s incorrect analysis, such information would lose its purpose as a disclosure.68 Beyond imposing a burdensome mandate of legal expertise on retail investors,69 the dissent’s standard would problematically enable firms to share misleading information under the façade of transparency.
Through its flawed counterarguments, the dissent advanced a new route for corporations to further curtail appraisals. Recently, the court has narrowed this doctrine by allowing contractual waivers of appraisal rights70 and tying valuations to the deal’s price.71 While such cases impose substantive limits on the remedy, the dissent exhibited receptiveness to a procedural restraint: misleading disclosures. Moreover, this new technique presents the most damaging constraint yet: whereas precedent allows investors to either “price in” contractual waivers ex ante72 or seek valuations with de facto ceilings,73 the dissent threatened to eliminate appraisal rights wholesale and ex post. Namely, facing this procedural blockade in addition to their already costly litigation,74 otherwise-dissenting shareholders could plausibly determine the legal expenditures of an appraisal to outweigh its expected recovery.75 Alternatively, some might fall prey to the deceptive information and mistakenly believe the judiciary’s valuation would be nominal.76 In either scenario, the shareholders would forgo appraisal even though they would have exercised such rights — and initially bought their shares with the confidence of this doctrine’s perceived protection — absent a misleading disclosure.
On a broader level, this split decision illustrated the continued decline of appraisals. Delaware’s legislature originally adopted the doctrine to protect shareholders from perceived inadequate deal prices,77 and appraisals continue to deliver such insurance by effectively setting a price floor on negotiations.78 Empirical research indicates merger targets receive higher deal premia after events strengthening appraisal remedies without a corresponding deterrent effect on the likelihood of consolidation,79 suggesting these actions aid all shareholders rather than just dissidents. Yet none of the Justices addressed these benefits — including the majority. Instead, they narrowly reversed the shareholders’ dismissal without ever acknowledging the doctrine’s greater significance. Considering the precarious outlook of appraisals,80 such a marginal decision fails to decelerate the remedy’s fading relevance. Should a similar case arise with stronger facts for the defendants, the dissent could plausibly garner another vote to maintain this decline. In particular, Brookfield’s efforts at an appraisal-rights closing condition81 possibly increased skepticism toward the proxy, and another merger could involve a comparably confusing disclosure without such documented attempts.82 But even accepting this seeming shareholder victory on its face, the split decision still signaled the court’s rising reluctance toward robust appraisal rights.
Although the shareholders in In re GGP prevailed, their reversal of a motion to dismiss by one vote hardly forms a resounding success. Rather, it demonstrates the continuously dwindling potency of Delaware’s appraisal rights. By shoehorning clarity into the proxy, the dissent muddied the prospects of future appraisals and invited corporations to dilute such rights through procedural creativity. Without further clarity on the topic, shareholders will only be further dissuaded from leveraging this doctrine — stifling a once-meaningful barrier against corporate exploitation.83 Given the court’s gradual erosion of such so-called rights, section 262 seems destined for the sleepy backwater from which it came.