The plaintiff’s motion for judgment on the pleadings was granted in part and denied in part. The plaintiff challenged a number of conditions imposed on their receipt of consideration for a merger: 1) to release all claims against the merged corporation; 2) an indemnification obligation; and 3) the use of a certain stockholders’ representative. The Court found the release obligation invalid because this condition was found only in the letter of transmittal to be executed upon transfer of the merger consideration. The release was not included in the merger agreement. The Court found therefore that the release was a condition imposed without consideration, because the merger price had already been set by the merger agreement. If it was found valid, “buyers could impose almost any post-closing condition or obligation on the target company‘s stockholders after the fact by including it as a requirement in the letter of transmittal.” The indemnification obligation was also found invalid, even though it was detailed in the merger agreement, because it violated Delaware General Corporation Law §251(b). No amount was set aside to satisfy the obligation, as it would be with an escrow structure, and no time limit was placed on potential claims. This left it impossible for stockholders to know what they would ultimately receive as consideration for the merger, and the Court stated that §251 “requires a merger agreement to set forth determinable merger consideration.” The Court imposed the requirement of a monetary cap and a time limit of 36 months or less, but it also stressed the limits of the holding, stating that it “does not concern escrow agreements, nor does it rule on the general validity of post-closing price adjustments requiring direct repayment from the stockholders.” As for the third challenged obligation, the Court held that the plaintiff failed to address adequately the question regarding the stockholder representative.
No post-merger obligation can be imposed on stockholders that interferes with their ability to determine the amount of the merger consideration
Nov 26, 2014