Minority Shareholders Not Precluded From Seeking Damages for Majority Shareholders’ Post-Merger Breaches of Fiduciary Duty
In Mitchell Partners, L.P. v. Irex Corporation, et al., the Third Circuit concluded that Pennsylvania’s appraisal statute does not preclude dissenting minority shareholders who are “squeezed out” in a merger from seeking remedies beyond the appraisal remedies provided in the statute. In the precedential ruling, the Third Circuit predicted that the Supreme Court of Pennsylvania would “permit a post-merger suit for damages based on the majority shareholders’ breach of their fiduciary duties.”
Plaintiff, Mitchell Partners, a minority shareholder in Irex Corporation (“Irex”), filed the underlying suit, claiming that its interests were undervalued when it was “squeezed out” when Irex merged with North Lime Holdings. Mitchell Partners sued Irex directors, accusing them of self-dealing, withholding key information from a committee that was supposed to represent minority shareholder interests and leaving details out of proxy materials. Mitchell Partners also asserted a post-merger claim for damages, alleging breach of fiduciary duties by the majority shareholders related to Irex’s cash-out merger with North Lime Holdings.
Pursuant to Pennsylvania law, a dissenting shareholder to a merger has the right “to obtain payment of the fair value of his shares.” 15 Pa. Cons. Stat. § 1571. The statute further provides that the appraisal remedy is to be pursued in a state court action initiated by the corporation against the dissenting shareholder after the shareholder has dissented and after the merger has been consummated. Furthermore, the relief provided by the appraisal remedy is limited to the fair valuation and payment of the dissenter’s shares. 15 Pa. Cons. Stat § 1105, “Restriction on equitable relief,” precludes a dissenting shareholder from seeking certain types of equitable relief, such as an injunction to prevent the merger.
The District Court held that, pursuant to Section 1105 and Pennsylvania case law, Pennsylvania’s appraisal statute was the sole post-merger remedy available to dissenting minority shareholders and dismissed Mitchell Partners’ complaint in its entirely.
On appeal, Mitchell Partners asserted that Section 1105 prohibits only certain types of equitable relief but does not limit a dissenting shareholders’ right to common-law damages based on a breach of fiduciary duty.” While neither Pennsylvania nor Third Circuit jurisprudence directly addressed the issue before the Court, the majority opinion relied upon numerous cases, including In re Jones & Laughlin Steel Corp. (Jones I), In re Jones & Laughlin Steel Corp. (Jones II) and Herskowitz v. Nutri/System, as well as case law from Delaware, to predict “that the Supreme Court of Pennsylvania would permit a post-merger suit for damages based on the majority shareholders’ breach of their fiduciary duties.” Circuit Judge Garth dissented from the majority opinion in finding that “Pennsylvania has clearly distinguished between pre-merger and post-merger remedies, and has stated by statute and decisional law that in a post-merger context, dissenting stockholders have only one remedy. That remedy is a statutory appraisal.”
Unless the Supreme Court of Pennsylvania states to the contrary, this decision makes clear that, under Pennsylvania law, minority shareholders may recover for breaches of fiduciary duty regardless of whether such breaches occurred pre or post-merger.