BERGER v. INTELIDENT SOLUTIONS, INC., 911 A.2d 1164 (Del.Ch. 2006)

C.A. No. 1527-N.Court of Chancery of Delaware.Submitted: September 6, 2006.
Decided: October 12, 2006.

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Ronald A. Brown, Jr., Prickett, Jones Elliott, P.A., Wilmington, DE, for the Plaintiff.

Michael R. Laskowski, Matt Neiderman, Duane Morris, LLP, Wilmington, DE; Stewart D. Aaron, Veronica E. Rendon, J. Alex Brophy, Arnold Porter, LLP, New York City, for the Defendants.

OPINION
LAMB, Vice Chancellor.

A former minority stockholder in a Florida corporation brings this suit for breach of fiduciary duty in connection with a freeze-out merger accomplished under Florida law. The corporate defendants move to dismiss the complaint for failure to state a claim upon which relief can be granted, arguing, inter alia, that an action for appraisal is the stockholder’s only remedy under Florida statutory law. The defendants further contend that the four-business-day notice of the merger given to the minority satisfied Florida’s statutory minimum requirement and, thus, was adequate notice as a matter of law. Reviewing the well pleaded allegations of fact most favorably to the plaintiff and drawing all reasonable inferences in the plaintiffs favor, the court finds that the complaint adequately alleges that the defendants violated their duty of disclosure despite technical compliance with the statutory notice period. For this reason, the motion to dismiss will be denied.

I.[1]
A. The Parties

Defendant Coast Dental Services, Inc., a Florida corporation, provides dental

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management services to a consortium of 106 dental centers in Florida, Georgia, Virginia, and Tennessee. In April 2004, Coast Dental deregistered and became a private company. Thereafter, Coast Dental’s stock traded intermittently on the pink sheets.

Before the challenged transaction, defendant Diasti Family Limited Partnership (“DFLP”), a Nevada limited partnership, owned approximately 67% of Coast Dental’s outstanding common stock. Terek Diasti, Coast Dental’s chairman, Adam Diasti, Coast Dental’s president and director, and Tim Diasti, Coast Dental’s director, controlled DFLP.

Defendant Intelident Solutions, Inc., a Delaware corporation, was formed by DFLP on May 11, 2005 to effectuate the merger. To consummate the transaction, Intelident formed a wholly owned Florida corporation called Intelident Merger Corporation to function as the acquisition vehicle to merge into Coast Dental. Because Coast Dental survived the transaction, Intelident Solutions emerged as the 100% owner of Coast Dental. Though DFLP remains the majority stockholder of Intelident, thirteen members of Coast Dental’s management obtained minority ownership positions as a result of the transaction.

Stephen M. Berger, the plaintiff, is a former minority stockholder of Coast Dental. Berger was cashed out as a result of the merger and seeks relief on his own behalf and purportedly on behalf of all former minority stockholders of Coast Dental.

B. The Freeze-Out Merger

In April 2005, DFLP, along with certain members of Coast Dental’s management, proposed to cash out the company’s minority stockholders for $6 per share. Coast Dental formed a special committee composed of two purportedly independent directors, Peter M. Sontag and Richard T. Welch, to analyze the proposal. The committee retained legal counsel and hired Capitalink L.C. to serve as its financial advisor. Capitalink’s preliminary analysis determined that $6 per share was an un-fair price. Following bargaining with the committee, DFLP increased its bid to $9.25 per share. Capitalink issued a fairness opinion at this price. The committee and the board of directors then approved the merger.

The company scheduled the stockholders’ vote for July 11, 2005. Neither the company, the board, nor DFLP informed the minority stockholders about the pendency of the transaction until mailing the proxy statement on July 1, 2005. Because July 1 fell on a Friday and because Monday, July 4, was a national holiday, the minority stockholders had a four-business-day window during which to receive and analyze the proxy material and potentially notify Coast Dental of a decision to seek appraisal.[2]
Allegedly, the committee members approved the timing of the proxy statement because they were offered the chance to continue as directors of the surviving company. Although it was disseminated on a breakneck schedule, the proxy statement did contain a ten-page summary of Capitalink’s valuation analysis. The proxy materials also offered to make management projections available to stockholders

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upon request. On July 11, DFLP voted its shares in favor of the merger. As a result, the minority stockholders were cashed out at $9.25 per share. No minority stockholders sought appraisal or voted on the transaction.[3]

II.
The plaintiff filed this individual and purported class action on July 29, 2005 against DFLP and Intelident Solutions. The complaint alleges that DFLP breached its fiduciary duties in connection with the freeze-out merger and requests relief in the form of “the difference between $9.25 per share and the `fair value’ of Coast Dental [shares].”[4] Essentially, the complaint boils down to two issues. First, the plaintiff claims that DFLP unfairly timed the merger in order to “keep minority shareholders in the dark as long as possible and to prevent anyone else from having time to make a better offer.”[5] This unfair dealing purportedly led to a cash-out price that was approximately half of Coast Dental’s book value. Second, the complaint claims that the proxy statement omitted and misstated material facts about the transaction. On this point, the plaintiff challenges the extent to which management projections and the methodology of Capitalink’s valuation analysis were disclosed.

The defendants originally moved to dismiss the complaint on September 22, 2005. This court granted the defendants’ motion on the grounds of forum non conveniens without reaching the issue of whether the complaint stated a claim upon which relief could be granted.[6] The Delaware Supreme Court reversed and remanded.[7] On June 15, 2006, the defendants renewed their motion to dismiss, again asserting that the complaint fails to state a cognizable claim. The defendants argue that because the company and DFLP complied with Florida’s ten day statutory notice provision when mailing the proxy materials, the plaintiffs claim of unfair dealing fails as a matter of law.[8] Additionally, the defendants argue that because the plaintiff seeks monetary damages, Florida’s appraisal exclusivity statute forecloses his claim.[9] In advancing this point, the defendants posit that a Florida court would follow New York law to interpret the appraisal statute,[10] and since New York law allows only equitable relief if appraisal is otherwise available, the plaintiffs present claim is inappropriate. Finally, the defendants argue that the alleged non-disclosures were not material and did not alter the total mix of information available to Coast Dental’s minority stockholders.[11] Both parties submitted briefs on this motion, and the court heard oral argument on September 6, 2006.

III.
A court will dismiss a complaint under Court of Chancery Rule 12(b)(6) only if it determines “with reasonable certainty that, under any set of facts that could be proven to support the claims asserted, the plaintiff would not be entitled

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to relief.”[12] The veracity of all well pleaded facts is assumed, as are all reasonable inferences which may be drawn from those facts.[13] However, a court should not “blindly accept as true all allegations, nor must it draw all inferences from them in the plaintiffs favor unless they are reasonable inferences.”[14] Mere conclusions of law or fact are insufficient.[15] Specific factual allegations must exist which logically tend to support the plaintiffs conclusions.[16]

IV.
A. The Applicable Statutes

This case involves the application of two Florida corporate statutes. The first, section 607.0705(1), requires that notice of a stockholders’ meeting be mailed no more than sixty days and no less than ten days before the date of the meeting.[17]
There is no dispute that the defendants technically complied with section 607.0705(1).

The second provision is Florida’s appraisal exclusivity statute. Section 607.1302(4) provides:

A shareholder entitled to appraisal lights under this chapter may not challenge a completed corporate action for which appraisal rights are available unless such corporate action (a) was not effectuated in accordance with the applicable provisions of this section or the corporation’s articles of incorporation, bylaws, or board of directors’ resolution authorizing the corporate action; or (b) was procured as a result of fraud or material misrepresentation.[18]

It is this section of Florida law which the court must now interpret.[19]

Under the internal affairs doctrine, as applied by Delaware courts, Florida law governs the substantive issues for decision.[20] But given the complete absence of Florida case law interpreting section 607.1302(4), this court must predict how a Florida tribunal would construe that provision. Florida courts often find Delaware law highly persuasive when confronting complex issues in the corporate arena.[21]
Moreover, when interpreting statutes, a Florida court will examine decisions from

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states whose provisions resemble those of Florida.[22]

The defendants correctly observe that Delaware law regarding the exclusivity of appraisal is judge-made, not statutory.[23] The absence of such a statutory provision does not, however, necessarily constrain this court’s understanding of the analytical framework a Florida court would adopt. Other courts, when faced with similar circumstances, have observed as much.[24]

The defendants argue that the settled law of New York with regard to appraisal exclusivity ought to foreclose the plaintiffs present claim. While New York’s jurisprudence is relevant to defining the parameters of the appraisal exclusivity provision of the Revised Model Business Corporation Act (“RMBCA”),[25] this court believes that a Florida court would follow the approach adopted by several other jurisdictions whose statutes mirror section 607.1302(4).[26] Rather than solely relying upon New York law, these jurisdictions have considered well established Delaware precedent when interpreting their appraisal statutes.[27]

B. The Appropriate Interpretive Framework

Section 13.02(d) of the RMBCA, upon which section 607.1302(4) is fashioned, embraces principles of Delaware common law regarding appraisal exclusivity.[28] Indeed, section 13.02(d) has been read as incorporating the teaching of Weinberger v. UOP, Inc.[29] and its progeny.[30]

In Weinberger, the court explained that an appropriate examination of the “entire fairness” of a freeze-out transaction entails a two-part inquiry: fair price and fair dealing.[31]
The fair price prong focuses upon issues involving the adequacy of consideration offered to the minority stockholders by the controlling interest.[32] Disputes that essentially challenge fair price, centering as they do upon matters of valuation, should typically be confined to

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appraisal proceedings.[33] Thus, where valuation issues objectively predominate in an entire fairness claim, appraisal is the minority stockholder’s exclusive legal remedy under Delaware law.[34]

But, as Rabkin v. Philip A. Hunt Chemical Corp.[35] later made clear, appraisal is not an exclusive remedy when a minority stockholder’s suit contains factually supported allegations of unfair dealing.[36] The fair dealing prong of entire fairness examines the transaction for procedural equity and involves “questions of when the transaction was timed, how it was initiated, structured, negotiated, disclosed to the directors, and how the approvals of the directors and the stockholders were obtained.”[37] Indeed, where “fraud, misrepresentation, . . . or gross and palpable overreaching are involved,” the appraisal remedy alone will prove inadequate.[38]

As Rabkin noted, reviewing courts face the difficult duty of spotting a fair price complaint artfully disguised in the camouflage of procedural unfairness.[39] For while “mere allegations of `unfair dealing,’ without more, cannot survive a motion to dismiss, averments containing `specific acts of fraud, misrepresentation, or other items of misconduct’ must be carefully examined . . . .”[40] This exercise of judicial review is necessary to strike a balance between “sustaining complaints averring faithless acts . . . and properly dismissing those allegations questioning judgmental factors of valuation.”[41]

Notably, other jurisdictions which have enacted provisions similar to section 607.1302(4) rely upon the fair price/fair procedure distinction in Weinberger. Specifically, the framework detailed above has guided judicial determinations as to whether the “fraud or material misrepresentation” exception contained in section 607.1302(4)(b) ought to apply to a particular claim. For example, in McMinn v. MBF Operating, Inc.,[42] the court quoted relevant language fro Weinberger which, in its judgment, was “helpful in defining the types of claims that are not adequately remedied by the statutory appraisal proceeding.”[43] Other courts have engaged in a similar analysis.[44] It is likely that a Florida court would follow the lead of these other states and employ Weinberger type test to decide if appraisal is the sole remedy for the plaintiff here.

The New York test advocated by the defendants to determine whether appraisal

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is the exclusive remedy places dispositive weight not on the factual allegations of fiduciary misconduct, but solely upon the remedy sought.[45] For example, in Szaloczi v. John R. Behrmann Revocable Trust, the Supreme Court of Colorado did not disturb the lower court’s holding that the complaint at issue alleged constructive fraud. But, in dismissing that complaint, the court followed New York precedent in ruling that it was “not enough to plead a cause of action over which equity has jurisdiction; the dissenting shareholder must request equitable relief.”[46] Therefore, under the New York approach, if the primary relief sought is monetary, appraisal is said to be the exclusive remedy.[47] And while this method has its practical advantages,[48] its rigid application to complaints such as the one here would require the premature and inequitable dismissal of an action legitimately challenging unfair dealing.

Here, the plaintiff contends that the defendants consciously used their majority position to ensure the minority stockholders had neither the time nor the opportunity to exercise their statutory appraisal rights. The complaint alleges that the inequitable timing chosen by the defendants prevented the exercise of the very remedy they now argue was the plaintiffs exclusive relief. But because the plaintiff seeks a monetary remedy rather than an equitable one,[49] the New York framework would require dismissal of the plaintiffs case.[50]
That result is unwarranted given the present facts.

Even if a Florida court chose to follow the New York formula in interpreting section 607.1302(4), the present action is factually distinguishable from the cases on which the defendants rely. For instance, in one recent case, the plaintiffs attempted to supplement their appraisal recovery with compensatory damages in a separate suit alleging fraud and breach of fiduciary duty. Thus, the plaintiffs there were trying to relitigate their judicially determined appraisal valuation.[51] This possibility does not exist here since no appraisal action has been brought. More importantly, in the cases applying the New York formula, the fraudulent or inequitable acts attributed to those defendants did not foreclose those plaintiffs’ ability to dissent and initiate an appraisal proceeding.[52] Here, the defendants’

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volitional conduct is alleged to have done just that.

While the remedy sought is likely a relevant factor in determining whether a complaint truly takes issue with price or procedure in a given transaction, the charge o Weinberger is to make a careful examination of the complaint in its entirety. As discussed below, that review yields the unavoidable conclusion that the plaintiffs primary allegations adequately allege unfair dealing.

C. The Plaintiff Alleges Facts Which, If Proven, Constitute “Fraud Or Material Misrepresentation” Under Section 607.1302U)(b)

Under Delaware law, when cashing out the minority stockholders in a merger, a majority stockholder has certain obligations, including a duty of disclosure. A majority stockholder must “disclose with entire candor all material facts concerning the merger, so that the minority stockholders [will] be able to make an informed decision as to whether to accept the merger price or to seek judicial remedies such as appraisal, an injunction, or a post-merger damage action.”[53] Because the minority must relinquish its stock in a cash-out transaction, stringent “[a]pplication of the required disclosure standards is deemed even more compelling.”[54] Indeed, duty of candor claims are highly contextual and are “rarely an appropriate issue for resolution on a motion to dismiss.”[55]

The defendants argue that because they mailed the notice of meeting and proxy statement within the minimum period for giving notice of all stockholder meetings prescribed by the Florida statute, the complaint fails to state a claim for a disclosure violation based on the brevity of the notice actually given. Compliance with the minimum statutory notice period, they say, is a legally determinative discharge of a controlling stockholder’s duty of disclosure. The defendants advance this argument even though the complaint alleges that the plaintiff had neither sufficient time to evaluate the proxy materials nor a reasonable opportunity to seek appraisal.[56]

This argument fails for several reasons. First, the statutory obligation to give notice and judicially imposed fiduciary duty of disclosure are not identical.[57]

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Instead, the fiduciary duty of disclosure “applies as a corollary to the statutory requirements.”[58] Under normal circumstances, compliance with a statutory notice provision is sufficient to satisfy the temporal element of the judicially imposed duty.[59] But this is not necessarily true in a case in which the circumstances strongly suggest that the notice period was grossly inadequate.

Here, the corporation mailed the notice of meeting and proxy statement exactly within the minimum ten calendar day period prescribed by statute. But if, as is alleged, the defendants chose the absolute minimum notice period available aware that it would not only prevent the minority stockholders from fully and fairly examining the proxy materials but also prevent them from exercising their appraisal rights, this court cannot say that a breach of the disclosure obligation did not occur.

The notion that “an otherwise candid proxy statement may be so untimely as to defeat its purpose of meeting the needs of a fully informed electorate” is elemental to the robust functioning of corporate democracy.[60] This axiom is especially applicable where the timing challenge pertains to initial, rather than supplemental, proxy materials of an unregistered company.[61] Clearly, “the facts alleged import a form of overreaching, and . . . deserve more considered analysis than can be accorded to them on a motion to dismiss.”[62] And as the plaintiffs complaint states a claim of procedural unfairness that “goes beyond issues of `mere inadequacy of price,'” dismissal on this point is improper.[63]

Second, the defendants’ alleged conduct contravenes an important axiom of equity jurisprudence. As was dutifully observed in Schnell v. Chris-Craft Industries:
“inequitable action does not become permissible simply because it is legally possible.”[64] Proper invocation of th Schnell doctrine is highly contextual and “should be reserved for those instances that threaten the fabric of the law, or which by an improper manipulation of the law, would deprive a person of a clear right”[65]

On the alleged facts, this case would appear to involve the kind of inequitable conduct that Schnell meant to thwart: the intentional deprivation of a clear statutory right to seek appraisal. The complaint avers that the defendants, as controlling stockholders of a thinly traded, unregistered corporation, consciously decided to send notice of a cash-out merger in the most abbreviated period allowed by statute — encompassing a national holiday and two weekends. Although the terms of the merger purportedly took months to structure

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and negotiate, the defendants apparently expected the plaintiff (and other minority stockholders) to receive notice of the transaction, to absorb and meaningfully analyze the proxy materials, to decide whether to seek appraisal, and to notify the company as to his (and their) decision in four business days.[66] Such extravagant expectations raise serious factual issues as to whether the timing of the transaction afforded the plaintiff a realistic opportunity to exercise his statutory appraisal remedy. In this regard, it is interesting to note the concession made at oral argument in response to the court’s questioning: no minority stockholders voted on the transaction and none sought appraisal. These additional facts, when viewed in the light most favorable to the plaintiff, further support the inference that the timing of the transaction was unreasonably manipulated.[67]

Statutory notice is but one facet of the “myriad of ministerial functions” which a majority stockholder, by virtue of its control over the board of directors, might manipulate to obtain an inequitable advantage over the minority.[68] And while the actual consummation of this merger may have been a foregone conclusion, this court is mindful that “in any voting context, actions taken for the purpose of interfering with a full and fair exercise of the stockholder franchise will run afoul” of basic equitable principles.[69] Given the Florida courts’ observance of well established Delaware corporate doctrines, this court has no reason to think a Florida court would hold otherwise.[70]

This court concludes that, under Florida law, the plaintiff alleges sufficient indicia of procedural unfairness to satisfy the “fraud or material misrepresentation” exception provided section 607.1302(4)(b). Where a controlling stock-holder purposefully manipulates the timing of the proxy process in a cash-out merger so as to preclude a minority stockholder from enjoying any realistic opportunity to exercise his statutory appraisal rights, a breach of the duty of disclosure occurs. Such a breach, as it plainly implicates the procedural fairness of a transaction, is

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properly addressed in an action outside an appraisal proceeding.

V.
For the foregoing reasons, the defendants’ motion to dismiss the complaint for failure to state a claim under Rule 12(b)(6) is DENIED. IT IS SO ORDERED.