Weinberger v. UOP, Inc.
457 A.2d 701 (Del.Supr. 1983)

  • Signal bought 51% of the stock of UOP for $21 a share. The other 49% was owned by a number of minority shareholders, including Weinberger.
  • Signal had extra cash they needed to do something with, so they decided to buy up the rest of UOP's stock in a cash-out merger.
    • In a cash-out merger, (aka a freeze-out merger) the parent (in this case Signal), creates a shell corporation, and then has the shell corporation and the subsidiary (UOP) vote to merge. As part of the merger agreement, all the minority shareholders (like Weinberger) are 'cashed out' and just give money instead of shares of the new, merged corporation.
  • UOP formed an independent committee to negotiate the deal. Signal proposed $20 a share, and the independent committee negotiated that up to $21. Plus, part of the deal was that a 'majority of the minority' shareholders had to approve.
  • The shareholders voted to approve the merger.
    • Signal provided a fairness opinion from an investment bank claiming that $21 was a fair price.
      • The stock was only trading for $14.50 at the time.
    • The shareholders were not told of a report written by two UOP executives and given directly to Signal that said that a fair price would be $21-$24 a share.
    • The facts are long and boring, but basically the deal was pushed through very quickly, which benefited Signal, but hurt UOP because it was difficult for minority shareholders to get all the info they needed to make an informed vote.
  • Weinberger and other minority shareholders sued.
    • When a cash-out merger occurs, the parent corporation sets how much money to pay for each share they are cashing out. If the minority shareholders don't think this is enough (and they didn't in this case), they can sue for a judicial appraisal to determine what a fair price would be.
      • See 8 Del.C. 262.
  • The Trial Court found for Signal. Weinberger appealed.
    • The Trial Court found that a minority shareholder must allege specific acts of fraud, misrepresentation, or other misconduct, to demonstrate the unfairness of the merger terms.
  • The Appellate Court reversed.
    • The Appellate Court found that there are two aspects to entire fairness - fair dealing, and fair price.
      • Fair dealing includes considerations of when the transaction was timed, how it was initiated, structured, and negotiated, disclosed to the directors, and how the approvals of the directors and the shareholders were obtained.
      • Fair price includes economic and financial considerations of the merger, including assts, market value, earnings, future prospects, and other things that could affect the stock price.
    • The Court found that there wasn't fair dealing, because:
      • There were conflicts of interest because UOP's directors were also directors of Signal and were writing secret memos to Signal about the UOP's value.
      • UOP's directors that were privy to the secret memos about Signal's estimate of UOP's value had breached their fiduciary duty by failing to inform the other UOP directors of what they knew.
      • The fairness opinion had been rushed by Signal and was probably not so accurate.
      • UOP shareholders were denied critical information about the merger prior to the vote.
    • The Court found that there wasn't fair price, because:
      • The Court found that the accounting methods used to determine the price of UOP did not meet the requirements of 262.
    • The Court rejected the business purpose test, which was the old standard.
      • The business purpose test says that you can't do a cash-out merger for the sole purpose of kicking out the minority shareholders. You must have a legitimate business purpose for the merger.
      • So now, in Delaware anyway, you can do a cash-out merger just to get rid of minority shareholders.
    • The Court found that the exclusive remedy for minority shareholder who can show a violation of fairness is judicial appraisal.
      • The Court did note that since appraisal might not be adequate where "fraud, misrepresentation, self-dealing, deliberate waste, or gross and palpable overreaching is involved." In those cases equitable relief or monetary damages might be appropriate.
      • See MCBA 13.02(d).
  • Note that under the entire fairness test, the burden of proof is on the directors, unless there has been approval by an independent committee or a majority of minority shareholders. If so, then the burden of proof shifts to the plaintiff.