In Samuels v. CCUR Holdings, Inc.,C.A. No. 2021-0358-PAF (Del. Ch. May 31, 2022), the Delaware Court of Chancery found that a shareholder may challenge the fair value of a payment for a fractional interest in a company under Section 155(2) of the Delaware General Corporation Law (DGCL). The court’s ruling did not grant an affirmative right to a Section 262-type appraisal; rather, Samuels provided further clarification of the circumstances under which a fair value determination may be appropriate. In this instance, where the company paid cash based on the market price of a share that was not widely traded in a reverse stock split, the fairness of the payment was in doubt, and thus an aggrieved shareholder could challenge the payment as a stand-alone claim under Section 155(2) of the DGCL.
In Samuels, the board of directors of CCUR Holdings, Inc., approved an amendment to the company’s certificate of incorporation to allow for a 3,000:1 reverse stock split. The goal of the reverse stock split was to take the company private. At the time of the amendment, the transaction provided that any shareholder who owned shares not evenly divisible by 3,000 would be cashed out at $3.06 per pre-split share. The $3.06 amount was calculated by the company’s financial advisor based on the share’s weighted average price over the past three months of trading, the past month of trading, and the past 18 days of trading, respectively. Shortly thereafter, the company learned that $13.8 million in cash would be frozen as a result of a criminal probe. The board of directors approved a write-down of the full amount of the frozen funds as a loss, and the payout for fractional shares was subsequently reduced to $2.86 per pre-split share. The $2.86 amount was calculated by the same financial advisor based on the share’s weighted average over a 14-day period following the disclosure of the frozen funds. The plaintiff owned 500 shares as of the effective date of the reverse stock split, following a sale of 65,798 shares. He sued the company and its board of directors for a violation of Section 155(2) of the DGCL and a breach of the directors’ fiduciary duties, respectively.
The defendants first challenged the plaintiff’s standing to pursue his[SHS1] claims based on the plaintiff’s participation in the reverse stock split. The court rejected the defendants’ argument. Unlike in Bershad v. Curtiss-Wright Corp., the plaintiff did not vote in favor of the certificate amendment, and he was involuntarily cashed out of his shares. Further, although the plaintiff sold a number of his shares for an amount less than the price provided under the reverse stock split, the court refused to dismiss his claims on an estoppel theory.
After dismissing the fiduciary duty claim, the court found that the plaintiff could maintain his claim under Section 155(2) of the DGCL. This section requires a company to pay fair value for fractions of a share. The defendants sought to dismiss the claim based on the argument that Section 155(2) of the DGCL did not provide a stand-alone claim for relief, and given that, the $2.86 price constituted fair value. The court rejected the defendants’ argument concerning the viability of a Section 155(2) claim. However, a question of fair value does not necessarily give rise to a Section 262 appraisal. The concept of fair value is not the same under Sections 155(2) and 262; each section was enacted to address a different situation. While a share’s market price may constitute fair value if there is no controlling shareholder and the shares are actively traded in a liquid market, the market price may not be determinative of fair value under different circumstances. The fact that CCUR’s shares were not actively traded in the 12-month period preceding the reverse stock split prevented the court from deferring to the market price on a motion to dismiss, and thus the Section 155(2) claim survived.
Samuels provides a potential means of redress for shareholders. Although a Section 155(2) claim does not require an appraisal-type evaluation, a company’s reliance on its shares’ market price is not automatically indicative of fair value, particularly if a company’s shares are not actively traded. In this limited circumstance, the Delaware Court of Chancery may permit an aggrieved shareholder to demonstrate why the value was not fair.
*Esther Soon Joo Hwang, a summer associate at McCarter & English not yet admitted to the bar, contributed to this alert.
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