The Delaware Court of Chancery recently addressed the right of individual dissenting shareholders to settle their appraisal demands. It upheld the ability of a surviving corporation in a merger to settle individual appraisal demands of certain non-appearing former stockholders, while a formal appraisal action was pending, on terms that may not be available to the petitioner and others who sought appraisal and over the objection of the appraisal petitioner, in Mannix v. PlasmaNet, C.A. No. 10502-CB (Del. Ch. July 21, 2015). It has long been the law of Delaware that a defendant in a class action, before a class is certified, may communicate with and settle claims of certain non-appearing putative class members, without the participation or approval of class counsel. Once a class is certified, however, the character of the action changes; communication with absent class members and settlement of their individual claims generally becomes subject to court regulation and the participation of class counsel. Although an appraisal action has many attributes of a certified class action, and notwithstanding the objections of the appraisal petitioner and his counsel, Chancellor Andre G. Bouchard in Mannix ruled that neither the text of Delaware’s appraisal statute, 8 Del. C. Section 262, nor the principles underlying the traditional line of demarcation in class actions, prevented the court from concluding that settlement of individual appraisal demands was just.
In Mannix, the petitioner commenced an appraisal proceeding for his 1,700 shares following the cash-out merger of Free Lotto Inc. into PlasmaNet Inc. Collectively, 48 stockholders owning in the aggregate about 3.5 million shares had dissented from the merger, demanded appraisal and were subject to having their claims determined in the proceeding commenced by the petitioner. The company proposed to settle the appraisal demands by offering shares in the surviving corporation subject to the condition that dissenting stockholders certify their status as “accredited investor” under the federal securities laws and dismiss their claims with prejudice. The “accredited investor” certification was necessary because the shares offered in settlement were not registered with the U.S. Securities and Exchange Commission. Four of the non-appearing dissenting stockholders who had demanded appraisal in the aggregate for about 1.8 million shares accepted the offer. The petitioner and other former PlasmaNet stockholders who demanded appraisal collectively for about 1.7 million shares did not accept the offer.
