N.C. Business Court Addresses the Scope of a Judicial Appraisal Proceeding
In Reynolds American Inc. v. Third Motion Equities Master Fund Ltd. et al., 2019 NCBC 35 (N.C. Super. Ct. June 4, 2019), the Business Court considered the scope of a judicial appraisal proceeding under G.S. § 55-13-30. The defendants, who owned stock in the plaintiff company, dissented from a merger involving the plaintiff and sought to have their interest bought out at fair value. Navigating an issue of first impression, Chief Judge Bledsoe held that whether the defendants had perfected their appraisal rights was a question beyond the scope of the proceeding and, accordingly, would not be considered at trial.
- A judicial appraisal proceeding is limited in scope under G.S. § 55-13-30.
- The question whether dissenting shareholders have perfected their appraisal rights is outside the scope of the proceeding, and will not be addressed by the Court, at least not where the issue is first raised after summary judgment.
- A corporation seeking to contest perfection should specifically request in their complaint a declaratory judgment that certain dissenting shareholders have not properly perfected their appraisal rights.
It all started when British American Tobacco p.l.c. (“BAT”) sought to increase its (already 42% indirect) ownership interest in Reynolds American, Inc. (“RAI”) by acquiring the balance of RAI’s outstanding common stock. Compl. ¶ 26.
Following extensive negotiations, the RAI shareholders voted overwhelmingly in favor of the acquisition, whereby the RAI shareholders would receive, in exchange for their RAI shares, “Merger Consideration” consisting of a mix of BAT shares and cash. Compl. ¶¶ 31, 36.
Not all RAI shareholders were on board with the acquisition, though. Instead of carrying forth their investment in RAI through an equity interest in BAT, a number of “dissenting” shareholders decided it was time to cash out.
The dissenting RAI shareholders thus exercised their appraisal rights pursuant to G.S. § 55-13-21, initiating a detailed process aimed to compensate the dissenters for the “fair value” of their shares.
The question then became, of course: What is the fair value of the RAI shares?
RAI estimated the fair value of the shares at $59.64, and sought to pay each dissenting shareholder accordingly. Reynolds American Inc., 2019 NCBC 35 ¶¶ 5-6. The dissenting shareholders (not surprisingly) disagreed with RAI’s valuation, and instead offered their own valuations ranging from $81.21 to $94.33 per share. Id. ¶ 7.
This disagreement prompted RAI to institute a proceeding under G.S. § 55-13-30, essentially asking the Court to resolve the parties’ dispute over the fair value of the dissenters’ RAI shares. Id. ¶ 8.
Once in the Business Court, the parties staked out their competing positions as to what they deemed “fair value” of the RAI stock. The difference in their valuations stemmed largely from disagreement over the “controlling date” for the valuation: Was it the date that the merger was announced that should be used to value the shares (as RAI argued), or was it the closing date of the merger that should control (as the dissenters argued)? Id. ¶ 8; CMO, ECF No. 33, p. 3-6.
As the case approached trial, RAI shifted focus to a different issue. RAI argued (in its pre-trial submissions) that certain dissenting shareholders had never perfected their appraisal rights, and therefore were not proper parties to the proceeding. These dissenters should be dismissed from the case, according to RAI, unless they could prove at trial that they had, in fact, perfected their appraisal rights (i.e., the burden was on the dissenters to make this showing). Id. ¶ 11.
The dissenters disagreed. They countered that “through filings or conduct in this litigation, [RAI] had admitted or waived its right to contest [the dissenters’] entitlement to appraisal.” Id. ¶ 14. Basically, RAI had conceded perfection when it instituted the appraisal proceeding, the scope of which was limited to determining the fair value of the dissenters’ shares. (The dissenters also disagreed that it was their burden to prove perfection.)
Addressing the issue on its own motion, and noting the late stage at which the “perfection” issue had been raised (after summary judgment and just prior to trial), the Court did not analyze the issue as one of “waiver.” Instead, the Court simply asked: Is the issue of perfection within the scope of a judicial appraisal proceeding? Put differently, was the dissenters’ perfection of (or failure to perfect) their appraisal rights a “relevant” issue for trial? Id. ¶ 16.
The answer, the Court concluded, was “no.”
The Court reasoned that perfection was not relevant to a judicial appraisal proceeding brought under G.S. § 55-13-30 because, first, the plain language of the statute did not allow the Court to consider it. Id. ¶¶ 26–28 (“There is no language in this subsection allowing or requiring a review of a dissenting shareholder’s entitlement to appraisal. The lack of such a provision is consistent throughout the statute.”).
But “[m]ost importantly,” according to the Court, the statute contemplates only two possible outcomes – and both involve the dissenting shareholders recovering a judgment. Id. ¶ 29. The dissenters are “entitled” to a judgment, and the question is simply the “form” of the judgment, which “depends upon whether the dissenter is (i) a shareholder that has already received a payment consistent with the corporation’s estimate fair value or (ii) a shareholder ‘for which the corporation elected to withhold payment under G.S 55-13-27.’” Id. (quoting G.S. § 55-13-30(e)). In short, there is “no third option” under the statute “whereby the corporation may obtain a judgment declaring certain shareholders are not entitled to appraisal after failing to perfect their appraisal rights.” Id.
The Court rejected RAI’s argument that perfection was a requirement “inherent” to (and therefore within the scope of) a judicial appraisal proceeding. The Court reasoned that although G.S. § 55-13-21(c) provides that a shareholder who votes in favor of a proposed corporate action “is not entitled to payment under this Article,” “only sections 55-13-30 and 55-13-31 deal directly with the subject matter of a judicial appraisal action, the trial court’s jurisdiction over that action, the required parties for such an action, and the relief the trail court may provide.” Id. ¶ 32. The more specific provision (section 55-13-30) and its clear instruction regarding the dissenters’ entitlement to a judgment in an appraisal proceeding therefore controlled. Id.
The Court also considered RAI’s (rather compelling) argument that:
“without a requirement that dissenting shareholders prove their entitlement to appraisal rights…, section 55-13-30 puts corporations in an impossible position of choosing to either comply with the procedures laid out by [the NC statutes] and bring a claim for judicial appraisal under section 55-13-30, thereby forfeiting the right to challenge a shareholders’ entitlement to appraisal, or to take a gamble by asserting that a shareholder is not entitled to appraisal, thereby risking any negative consequences that might follow should the corporation be incorrect, all without the benefit of discovery.” Id. ¶ 39.
The Court did not completely disagree with this line of reasoning, but observed that it was the function of the General Assembly, not the Court, “to make decisions based on such policy concerns.” Id. ¶ 40. Likewise, the Court declined to adopt the two-step process utilized by the Delaware Chancery Court – whereby the court first determined perfection, and proceeded second to determine fair value only if perfection was met. Id. ¶ 40. While noting that there was “much to commend about the clarity and simplicity offered by Delaware’s statute,” the Court reiterated that it could not “ignore the lack of any such statutory provision in North Carolina’s Business Corporation Act, nor [could] it create one on its own.” Id.
Finally, the Court further rested its decision on the fact that RAI never requested a judicial determination as to the dissenter’s appraisal rights. RAI had simply filed a “Complaint for Judicial Appraisal” seeking a determination as to the fair value of the dissenters’ shares, and “did not seek a judicial determination or declaration that [the dissenters] failed to perfect their appraisal rights and did not forecast [the dissenters’] perfection of rights as an issue for judicial determination in the parties’ Case Management Order.” Id. ¶ 45. Nor had RAI amended its complaint, after the issue of perfection was raised, to include a request for declaratory judgment as to the dissenters’ appraisal rights. Id. ¶ 46. Thus, even assuming that the statute allowed the Court to address the issue of perfection, “RAI’s failure to bring a claim for declaratory judgment, request other relief, or even plead facts showing the existence of a controversy as to [the dissenters’] perfection of appraisal rights would still place a determination regarding the [dissenters’] right to participate in this proceeding beyond the scope of the present case.” Id. ¶ 47 (citing N.C. R. Civ. P. 57 and N.C. R. Civ. P. 8(a)(1)).
In sum, based on the statute, the pleadings, and the late stage at which “perfection” had been raised, the issue of whether the dissenters had perfected their appraisal rights was outside the limited scope of the judicial appraisal proceeding. As such, any evidence relating to perfection was “irrelevant” and inadmissible at trial.