Delaware Chancery Court Strictly Construes Appraisal Statute to Deny Stockholders Appraisal Rights in a Reverse Triangular Merger
In City of North Miami Beach Gen. Employees’ Ret. Plan v. Dr Pepper Snapple Group, Inc., C.A. No. 2018-0227-AGB, 2018 WL 2473150 (Del. Ch. June 1, 2018), the Delaware Court of Chancery(Bouchard, C.) denied stockholders of Dr Pepper Snapple Group, Inc. (“Dr Pepper”) appraisal rights related to the reverse triangular merger of Keurig Green Mountain, Inc. (“Keurig”) and a subsidiary of Dr Pepper created for the purpose of effectuating the merger. This decision clarifies standing requirements for appraisal petitions in this merger structure and continues Delaware jurisprudence holding that, to perfect appraisal rights, stockholders must at a minimum meet the requirements of 8 Del. C. § 262 as plainly written.
In early 2018, Dr Pepper and Keurig reached an agreement to combine their businesses. Through a reverse triangular merger, Keurig will become an indirect wholly-owned subsidiary of Dr Pepper. Dr Pepper stockholders will retain their shares, which will account for 13% of the combined company’s shares, and the indirect owners of Keurig will receive Dr Pepper shares amounting to 87% of the combined company’s equity. While Dr Pepper stockholders were asked to approve two proposals necessary to effectuate the transaction at a stockholder meeting planned for June 29, they were not asked to approve the merger of the Dr Pepper subsidiary with the parent of Keurig. The proxy statement issued for that stockholder meeting thus informed Dr Pepper stockholders that they did not have appraisal rights under Section 262 in connection with the proposed transaction. The Court was presented cross motions for summary judgment in an action brought by two stockholders on the issue of whether the stockholders should have appraisal rights with respect to the transaction.
First, the Court held that the term “constituent corporation” as used in Section 262 “means an entity actually being merged or combined and not the parent of such an entity.” The constituents in the reverse merger were Keurig and the Dr Pepper subsidiary, not Dr Pepper itself. Because the stockholders of Dr Pepper held no shares in any constituent corporation, they were not entitled to statutory appraisal rights.
The Court held that this was similar in character to Section 262(b)(1)(ii)’s reference to “surviving corporation” in the context of the requirement for an approval by vote of stockholders of such a corporation. In In re Inergy L.P. Unitholder Litig., 2010 WL 4273197 (Del. Ch. Oct. 29, 2010), the Court explained that whether a corporation was a “surviving corporation” turns on whether it is “actively ‘merging’ or ‘consolidating’ with another entity so that it is a constituent party to such merger or consolidation.” In that case, the contractual entity of which the petitioners owned stock was not a constituent, and therefore the stockholders were not entitled to a vote.
The Dr Pepper stockholders argued that despite the language of Section 262, they “ought” to be held to have appraisal rights. In disagreeing with the stockholders’ reading of that statute in favor of a strict reading, the Chancery Court showed its concern as to the expansion of appraisal rights under Section 262. The Court held that, consistent with Inergy and Lewis v. Ward, 2003 WL 22461894 (Del. Ch. Oct. 29, 2003), stockholders of a parent corporation whose subsidiary is merging in a triangular merger generally do not have the right to vote on a merger, and similarly are not entitled to appraisal.
As a second sufficient ground for its decision, the Court held that Section 262 clearly requires relinquishment of shares in order to establish the right to appraisal in a merger. In contrast, the Dr Pepper stockholders would retain their shares of Dr Pepper after the merger. The fact that these shares would be significantly diluted resulting in Dr Pepper’s loss of control to the resulting parent did not alter the Court’s reading of the statute. The Court held that this result, in turn, confirmed its reading of “constituent corporation” because only a stockholder who holds shares in a corporation that is actually merging would be forced to relinquish those shares.
The Dr Pepper decision confirms the Delaware Chancery Court’s strict interpretation of appraisal rights created by Section 262. Reading that statute literally and applying it to this unique form of merger, the Court showed its hesitance to extend Section 262 to create broader rights that stockholders feel they “ought” to have when those purported rights would stem out of a transaction structure not covered by Section 262.