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Glassman v. Unocal Exploration Corp., 777 A.2d 242

Facts

Unocal Corporation, which owned approximately 96% of Unocal Exploration Corporation (UXC), decided to eliminate the minority shareholders of UXC to reduce taxes and overhead expenses amid declining revenues due to low natural gas prices. In December 1991, special committees from both companies were formed to consider a merger, leading to an exchange ratio of .54 shares of Unocal stock for each share of UXC. The merger was announced on February 24, 1992, and executed on May 2, 1992, with the Notice of Merger informing former UXC stockholders of their appraisal rights. Minority shareholders filed a class action on the day of the merger announcement, claiming breaches of fiduciary duties.

Unocal owned approximately 96% of the stock of Unocal Exploration Corporation (“UXC”), an oil and gas company operating in and around the Gulf of Mexico. In 1991, low natural gas prices caused a drop in both companies' revenues and earnings.

Issue

Whether a parent corporation must establish entire fairness in a short-form merger and what remedies are available to minority shareholders dissatisfied with the merger consideration.

The Supreme Court, Berger, J., held that: (1) in “short-form” merger, parent corporation does not have to establish entire fairness, and (2) absent fraud or illegality, only recourse for minority stockholder who is dissatisfied with consideration resulting from “short-form” merger is appraisal.

Rule

In a short-form merger, the parent corporation does not have to establish entire fairness, and absent fraud or illegality, the only recourse for minority stockholders dissatisfied with the merger consideration is appraisal.

The statute authorizes the elimination of minority stockholders by a summary process that does not involve the “fair dealing” component of entire fairness.

Analysis

The court determined that the short-form merger statute allows a parent corporation to eliminate minority shareholders without the need for a fair dealing component, which is typically required in self-dealing transactions. The court found that the statutory process does not involve negotiations or approvals from minority shareholders, thus precluding the establishment of entire fairness. The court emphasized that the General Assembly intended to simplify the merger process, which limits the obligations of the parent corporation to the minority shareholders.

The equitable claim plainly conflicts with the statute. If a corporate fiduciary follows the truncated process authorized by § 253, it will not be able to establish the fair dealing prong of entire fairness.

Conclusion

The court affirmed the decision of the Court of Chancery, holding that the plaintiffs' only remedy in connection with the short-form merger was appraisal.

Based on the foregoing, we affirm the Court of Chancery and hold that plaintiffs' only remedy in connection with the short-form merger of UXC into Unocal was appraisal.

Who won?

Unocal Corporation prevailed in the case because the court ruled that it was not required to establish entire fairness in the short-form merger and that the minority shareholders' only remedy was appraisal.

The Court of Chancery conducted a two day trial and held that: (i) the Prospectus did not contain any material misstatements or omissions; (ii) the entire fairness standard does not control in a short-form merger; and (iii) plaintiffs' exclusive remedy in this case was appraisal.

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