The Delaware Court of Chancery has held that the entire fairness standard applied to a cash out merger but not because the directors and their families owned over half of the shares. Rather, the entire fairness standard applied because the directors were to remain shareholders after the merger, thus incentivizing the board to pay as little as possible to the cashed out shareholders, rendering the directors “interested”. In In re PNB Holding Co., a small rural bank holding company believed that converting to Subchapter S status would increase the returns to shareholders. To reduce the 360 shareholders to seventy-five or fewer, to meet Subchapter S requirements, the bank effected a merger with a wholly-owned Subchapter S corporation in which only shareholders with more than 2,000 shares would remain shareholders. The others would be cashed out. All of the officers and directors (and 27 of their family members) qualified to remain shareholders, as did about 9% of the other shareholders. Some shareholders perfected appraisal rights. Others asserted a claim for breach of fiduciary duties.
Vice Chancellor Strine found that the fair value of the shares was about 28% greater than the merger consideration. He also found that the defendants did not demonstrate that the merger was entirely fair and awarded identical relief to those shareholders who did not vote yes on the merger and who did not dissent. He denied recovery to shareholders who voted yes on the merger, and therefore acquiesced.
The family aspects of this case are of particular interest. Vice Chancellor Strine rejected the argument that the directors and their families constituted a controlling bloc because they owned about 60% of the stock. The Vice Chancellor declined to aggregate the officers’ and directors’ 33% of the shares with those of their family members.
“[T]he idea that children and parents always see eye-to-eye is not a premise of our law. One can have a healthy family relationship and still feel free to vote one’s stock differently than a parent.”
“[W]hat is critical is whether there is a reason to believe that the familial relationship, coupled with other important facts, is so thick that the stockholders should be treated as essentially a voting group.”
He then held that familial relationships were relevant to whether the directors were interested. Vice Chancellor Strine held that the economic benefits of remaining a shareholder were material to the directors because several directors made efforts to increase the shareholdings of their family members so that they could remain shareholders.
Quaere whether the fact that Vice Chancellor Strine is dubitant about the wisdom of Lynch might have made him inclined, subconsciously, to discount the power of family when deciding whether to find “control”.
Block that metaphor quote:
“Glomming share-owning directors together into one undifferentiated mass with a single hypothetical brain would result in an unprincipled Frankensteinian version of the already debatable 800-pound gorilla theory of the controlling shareholder that animates the Lynch line of reasoning.”