Delaware law generally grants appraisal rights to shareholders of corporations involved in statutory mergers or consolidations. But, what are the rights of shareholders when control of their corporation is relinquished through a merger between a specially-created merger subsidiary and another corporation? According to Chancellor Bouchard’s recent opinion, the shareholders have no appraisal rights because they do not own shares in a “constituent corporation in the merger.” Chancellor Bouchard also found that the shareholders are not entitled to appraisal rights because they will retain their shares in the parent corporation in the contemplated transaction.
Dr. Pepper Snapple Group, Inc., a publicly-traded corporation, and Keurig Green Mountain, Inc., a privately-held corporation, wanted to combine their businesses. They therefore agreed to a so-called reverse triangular merger, pursuant to which (1) Dr. Pepper will create a new subsidiary, (2) that subsidiary will be merged into Keurig’s owner, Maple Parent Holdings Corp., and (3) Maple Parent will become a wholly-owned subsidiary of Dr. Pepper. In addition, Maple Parent will pay a $9 billion dividend to Dr. Pepper and receive enough shares in Dr. Pepper to give it a controlling 87% share of Dr. Pepper’s common stock. Maple Parent’s $9 billion payment to Dr. Pepper will then be used to help finance special cash dividends of $103.75 per share to Dr. Pepper’s pre-merger shareholders.
From the perspective of a Dr. Pepper shareholder, the economic consequences of the transaction resemble those of a traditional for-cash consolidation: the shareholders will relinquish control of Dr. Pepper to a new investor in exchange for cash from that investor. But, a proxy statement to the Dr. Pepper shareholders stated that they will not have any appraisal rights if they are dissatisfied with the consideration they will receive in the transaction. Two shareholders therefore sued in the Delaware Court of Chancery, claiming that they are entitled to appraisal rights and seeking to enjoin the merger until their appraisal rights are recognized.
Chancellor Bouchard rejected the shareholders’ contentions for two reasons.
First, Delaware’s appraisal statute expressly grants appraisal rights only to the owners of stock “of a constituent corporation in a merger or consolidation.” Although “constituent corporation” is not defined in Delaware’s corporations statute, Chancellor Bouchard concluded that the term refers to the “entities that actually were merged or combined in the transaction and not a parent of such entities.” Because Dr. Pepper’s subsidiary, and not Dr. Pepper itself, will be merged in the transaction, Dr. Pepper is not a “constituent corporation,” and its dissenting shareholders are not entitled to an appraisal.
Second, the Delaware appraisal statute grants appraisal rights to shareholders of corporations that, like Dr. Pepper, are listed on a national exchange only when the shareholders are “required . . . to accept for such stock” certain specified types of consideration, such as cash. Chancellor Bouchard interpreted this provision as requiring that the shareholders be required to relinquish their shares before they would have appraisal rights. In the proposed Dr. Pepper merger, the shareholders will retain their shares, but those shares will be substantially diluted and control of the corporation will be turned over to Maple Parent. In exchange for that dilution and transfer of control, the shareholders will receive cash for each share. Thus, “the structure and economic reality of this deal” was arguably tantamount to a cash-out of the shareholders’ stock. But, Chancellor Bouchard declined to “disregard the express terms of the appraisal statute to surmise the underlying economic effect and practical effect of the Merger” and concluded that the shareholders have no appraisal rights because they will retain their (albeit diluted) shares in Dr. Pepper.
This opinion is a clear example of Chancellor Bouchard’s fidelity to statutory language and his disinclination to depart from the express words in a statute even when “economic realities” may call for it.