Pennsylvania Supreme Court Concludes That Dissenting Shareholders’ Post-Merger Recourse Is Limited to Judicial Appraisal

As discussed in a previous post, the Third Circuit’s August 2012 ruling in Mitchell Partners, L.P. v. Irex Corp. predicted that the Pennsylvania Supreme Court would “permit a post-merger suit for damages based on the majority shareholders’ breach of their fiduciary duties.” As a result, the Third Circuit concluded that Pennsylvania’s appraisal statute did not preclude dissenting minority shareholders who are “squeezed out” in a merger from seeking remedies beyond the appraisal remedies provided in the statute. However, on certification, the Pennsylvania Supreme Court concluded that minority shareholders who oppose a merger have no recourse — in the absence of fraud or fundamental unfairness — other than to seek judicial appraisal of the value of their post-merger shares.

Following the Third Circuit’s ruling, defendants sought rehearing, and the Governor of Pennsylvania and numerous business groups moved for leave to file amicus briefs. In particular, the Governor of Pennsylvania requested the Third Circuit to grant rehearing and certify a question of law to the Pennsylvania Supreme Court. The Third Circuit accepted, and the Pennsylvania Supreme Court granted certification to address the exclusiveness of a Pennsylvania statutory appraisal remedy to minority shareholders in certain merger scenarios. Specifically, the Court certified the issue of whether “15 Pa.[C.S.] §1105, providing for appraisal of the value of the shares of minority shareholders who are “squeezed out” in a cash-out merger[,] preclude all other post-merger remedies including claims of fraud, breach of fiduciary duty, and other common law claims.”

In response to the certified question, the Court noted that the issue is one of statutory interpretation in which the Court’s “task is to determine the will of the General Assembly” as to the meaning of Section 1105. Based upon the plain language of the statute, the Court explained that the statutory remedies of Section 1105 are not made to be exclusive where fraud or fundamental unfairness are present. While the Court noted its “primary impediment” to a literal interpretation of Section 1105 as written is the Jones decision, the Court distinguished Jones because it “arose in the context of an appraisal proceeding and was concerned with the jurisdiction of the appraisal court.” Accordingly, the Court “decline[d] to extend the decision’s holding outside the context of determining the jurisdiction of a statutory appraisal court.”

In concluding that Section 1105 precludes post-merger remedies other than appraisal only in the absence of fraud or fundamental unfairness, the Court explicitly cautioned that “Section 1105 does not serve as a restriction on non-appraisal proceedings. In this regard, we believe that the General Assembly did not intend for the notion of exclusivity – as modified by the exception for fraud or fundamental unfairness – to curtail actions outside the appraisal context.” While the Court emphasized the existence of the fraud or fundamental unfairness exception, it also noted that the exception “may not be invoked lightly” and that “appraisal is intended as the usual remedy in the absence of exceptional circumstances.”