Tuesday, June 05, 2018

Shareholders of parent in reverse triangular merger lack appraisal rights

By Anne Sherry, J.D.

The Delaware Court of Chancery held that the state’s corporation law does not provide appraisal rights to shareholders of the parent of a party to a merger, as the parent is not a “constituent corporation.” Furthermore, shareholders of Dr Pepper Snapple Group, which is creating a subsidiary to merge into Keurig Green Mountain in a reverse triangular merger, are retaining their shares in connection with the transaction; the appraisal statute contemplates that the shares will be relinquished (City of North Miami Beach General Employees’ Retirement Plan v. Dr Pepper Snapple Group, Inc., June 1, 2018, Bouchard, A.).

Merger and proposals. Through the reverse triangular merger, a merger subsidiary of Dr Pepper will combine with the parent of Keurig, making Keurig an indirect wholly owned subsidiary of Dr Pepper. Dr Pepper stockholders will receive a special cash dividend of $103.75 per share and will retain their shares, which will account for 13 percent of the shares of the combined company. The indirect owners of Keurig will hold the remaining 87 percent as shares of Dr Pepper.

Dr Pepper stockholders are not being asked to approve the merger, but to approve two proposals necessary to effect the transaction. On March 8, Dr Pepper issued a preliminary proxy statement that stated that its stockholders will not have appraisal rights under Section 262 of the Delaware General Corporation Law. Two institutional stockholders filed an action asking the court to enjoin the merger until stockholders are provided their appraisal rights, or alternatively to permit class members to demand and petition for appraisal.

DGCL does not provide appraisal rights. The Chancellor held, however, that the DGCL does not provide appraisal rights to the plaintiffs for two statutory reasons. First, Dr Pepper is not a “constituent corporation” in the merger. Although the DGCL does not explicitly define the term, the provisions that use it “clearly imply that ‘constituent corporations’ are entities that actually were merged or combined in the transaction and not a parent of such entities.” The plaintiffs offered dictum from a chancery court opinion suggesting that it might be appropriate at times to disregard corporate formalities in the context of an asset sale, but that reasoning would have more significant negative repercussions in the context of the appraisal statute. “The fact that Merger Sub merely functions as an intermediary entity, solely formed to facilitate the Merger, does not confer Merger Sub’s status as a constituent corporation on its parent Dr Pepper,” the court explained.

The second statutory reason that Dr Pepper stockholders are not entitled to appraisal rights is that they are not being forced to give up their shares. The three-step process for determining entitlement to appraisal “plainly contemplates that the stockholder relinquish its shares.” The statute does not bestow appraisal rights upon a mere sale of control, but only when stockholders’ shares “are being taken from them in certain, statutorily specified types of transactions.” The court did not believe that its decision would open the door to abuse as the form of transaction has been used for nearly ten years, but even so, it is for the legislature to amend the statute if it is concerned that stockholders lack appraisal rights in such a transaction.

The case is No. 2018-0227-AGB.