Recent Delaware Decisions May Prove to be “Entirely Unfair” to Minority Shareholders in Parent Merger with Partially Owned Subsidiary

Abstract

Two Delaware cases that were decided in the summer of 2001 strip a target’s minority shareholders of the protections afforded them by an entire fairness review in the context of a parent company’s acquisition of a partially owned subsidiary through a tender offer followed by a back-end short-form merger. In In re Siliconix Inc. Shareholders Litigation, a class action lawsuit, Delaware Vice Chancellor John Noble held that a unilateral tender offer (whether a cash offer or a stock-for-stock exchange offer) by a parent for a subsidiary does not invoke the entire fairness doctrine, principally because the transaction does not involve a merger requiring any action from the target’s board of directors. In Glassman v. Unocal Exploration Corp., handed down a month later, the Delaware Supreme Court held that in a short-form merger pursuant to title 8, section 253 of the Delaware Code, the ‘parent corporation does not have to establish entire fairness, and, absent fraud or illegality, the only recourse for a minority stockholder who is dissatisfied with the merger consideration is appraisal.‘ As a result of these two decisions, it appears that a parent company can freeze out the minority without ever having to satisfy an entire fairness review by first engaging in a tender offer, and subsequently executing a short-form merger.