William Davis

Law & Valuation
Professor Palmiter
Spring, 1999


An appraisal remedy is one method that can be used to protect minority shareholders. In the event of a merger or acquisition, majority shareholders can force out the minority for a price lower than the stock’s true value. However, an appraisal remedy allows minority shareholders who did not vote for the merger to petition the court for an appraisal hearing. The court will then determine the fair value of the minority shares. Delaware has such an appraisal remedy statute. Originally valuation had to be done by the Delaware Block Method, but now courts may use any accepted valuation methods.
1.  Can the plans and strategies to be used by the acquiring company that were implemented between the dates of the merger agreement and the final merger be included in the valuation of the merged company?
2.  Does the holding of the case conflict with the statute?
1.  Yes, according to the Delaware Supreme Court in Cede & Co. v. Technicolor, IV.
2.  No, as it aligns with the purpose of the statue, protection of minority shareholders.
Cede & Co. v. Technicolor is a line of cases that originated when MAF acquired Technicolor in a merger.  Cede was a shareholder who brought an action for the appraisal remedy and also sued for fraud and unfair dealing, but lost on the latter actions.  In the final case, an important issue was whether the acquiring company’s plans that were implemented between the dates of the merger agreement and the final merger could be included in the valuation of the merged company.  The Delaware Supreme Court held that Technicolor could be valued using the new management’s plans and strategies as a factor.

The appraisal remedy statute states that valuation must be on the date of the merger and cannot include any element of value arising from the merger or expectation surrounding it.  However, this may lead to conflict, as new management may have already implemented new plans by the date of the merger.  However, the Court worked around this by excluding speculative elements of value arising from the accomplishment or expectation of the merger, but allowing known or provable elements of future value.

It could be possible to construe this decision as conflicting with the statute.  However, it follows the purpose surrounding the appraisal remedy, the protection of minority shareholders.  If the court did not include the new plan of management, the minority would be forced out of an investment that they did not want to exit, and at less than the fair value on the date of the merger, giving the new majority a windfall.  Thus, the court’s decision allowed the minority to receive the true value of their investment on the date of the merger.

The decision in Cede & Co. v. Technicolor, IV could have many implications.  First, the outcome for the minority shareholders will be different based on whether the merger is structured in one step or two, in that minority shareholders have no control whatsoever in a one step merger.  Second, determining how speculative new management’s plans may or may not be might be difficult. The steps outlined by the court are rather vague and will need to be more defined in the future. Finally, it might discourage two-step mergers, or those using two step mergers may need to make a tender offer in the first step at a substantial premium, or they may wait until the second step has been completed to implement their plans.  However, this is not likely because the appraisal remedy is not often used by plaintiffs because of procedural and financial burdens.  Also, the benefits of using a two step merger will outweigh any problems caused by this decision.

An important goal of corporations law is to protect minority shareholders and the legislature and courts have developed several techniques to accomplish this.  Delaware’s appraisal remedy, 8 Del. C. § 262 is one tool for minority shareholders to use in protecting there interests. Over the years the scope and use of this remedy has changed through interpretation by the courts.  One such case that highlights some of these changes are Cede & Co. v. Technicolor, Inc. line of cases.  These cases are a good example of many of the benefits and short comings of the Delaware’s appraisal remedy.  This paper will attempt to critique the latest decision from the Supreme Court of Delaware on this long running case and its implications for the appraisal remedy, Cede & Co. v. Technicolor, Inc., 684 A.2d 289 (1996).
Minority shareholders can be subject to abuse by the majority because of their lack of control.  This concern is at its greatest when one company is about to merge or consolidate with another, especially when the majority forces out the minority in a cash-out merger.  In a cash-out merger the majority can force out the minority for a price lower than the stocks true value. The Delaware Code, in 8 Del. C. § 262, allows minority shareholders who did not vote for the merger to petition the court for an appraisal hearing.  If all of the requirements of the statute are met and the procedures are followed, the court, after hearing evidence from both the merged corporation and the dissenting shareholders, will determine the fair value of the minority shares.  Originally the court was required to value companies via the “Delaware Block Method”, but because of the methods rigidity the courts are now free to use “any techniques or methods which are generally considered acceptable in the financial community and otherwise admissible in court.” [1]

Historically, the appraisal remedy served a liquidity function allowing minority shareholders to exit an investment which no longer resembled their original investment because of the merger or consolidation.[2]  Now the appraisal remedy serves a different purpose.  Because cash-out mergers have become commonplace and the nature of corporate transactions has changed the remedy serves as a way to protect minority shareholder from abuses by the majority.[3]

The Cede v. Technicolor line of cases originated from the acquisition of Technicolor by Mac Andrews and Forbes Group, Inc (“MAF”) in a two step merger in 1983.  First in November of 1982, MAF made a tender offer for $23 a share acquiring control with over eighty-two percent of Technicolor’s shares.[4]  Then about three months later, at a special shareholders meeting, 89 percent of the shareholders approved a cash-out merger with MAF, making Technicolor a wholly-owned subsidiary of MAF.[5]

After the merger a shareholder (“Cede”) not only brought an action for the appraisal remedy (“appraisal action”) but also attacked the transaction by bringing a rescissory damages lawsuit for fraud and unfair dealing (“fraud action”).[6]  The first appeal concerned an interlocutory judgment in the fraud action.  The court held “that [Cede] was entitled to pursue its appraisal action and its [fraud] action concurrently, through trial.”[7]  Ultimately Cede lost the fraud action and was left with the appraisal remedy.

The opinion in focus here is the last Delaware Supreme Court ruling concerning the appraisal remedy, Cede v. Technicolor, Inc., 684 A.2d 289 (1996).  The issue is whether to include in the valuation “MAF’s new business plans and strategies, which the Court of Chancery found not speculative but had been adopted and implemented between the date of the merger agreement and the date of the final merger.”[8] Citing Weinberger v. UOP, the Delaware Supreme Court held the it was proper to value Technicolor using the new management’s plans.[9]

The appraisal remedy statute states that the appraised value must be on the date of the merger and “exclusive of any element of value arising from the accomplishment or expectation of the merger”.[10]  In this case and in most two-step mergers these two requirements conflict.  If you chose the date of the merger it would be proper to value Technicolor under the new business plan.  If you excluded any value from new management the court would be valuing Technicolor under the old management’s plans, three months before the final merger.  Two factors kept this from happening.  First, citing Weinberger v. UOP, the court construed the statutory phrase narrowly, excluding “[o]nly the speculative elements of value that may arise from the ‘accomplishment or expectation’ of the merger” and “elements of future value…which known or susceptible of proof as of the date of the merger and not the product of speculation, may be considered.”[11]  Second, in an earlier decision the Delaware Court of Chancery found that between the time of the merger offer and the completion of the merger, new management had already formulated and begun implementing their new plan.


The first question is whether his decision is justified under the purposes of the Delaware appraisal statute.  Under the old justification, where the appraisal remedy had a liquidity purpose only allowing minority shareholders to exit investments they no longer wanted, this decision is weak.  By allowing a valuation that includes the new management’s plans the minority shareholders are receiving a windfall.  First, they were exiting the investment whether the new management had any plans or not and, second, the investment they entered was Technicolor run by old management.  Under current rational, where the appraisal remedy is meant to protect minority shareholder rights, the decision is much more justifiable.  The minority shareholder in this transaction and other cash-out mergers do not want to exit the investment.  This can be inferred in this case by the fact that many of the shareholders did not sell their shares during the original tender offer. (The first step in the two step merger.)  The minority shareholders kept their shares because they felt that the new management, who had just gained control of the firm will have a positive influence on the profitability of the company and the value of the shares were greater than the original tender offer.  (The acquiring firm also has this opinion or they would not have acquired the company in the first place.)  By allowing the new majority to cash-out the minority without factoring in their new plan of management, which at this time would be more than speculative, the court is undervaluing the minorities shares and giving the new majority a windfall.


This decision could have wide ranging implications both on the Delaware appraisal remedy and management’s decision on how mergers are structured in Delaware.

Legal Implications

First, this decision now makes the implementation of the Delaware appraisal statute different for one and two step mergers.  In one-step mergers where the minority is cashed-out all it once, the valuation is determined without looking at any of the effects the merger could have on profitability.  This happens, no matter how well known and concrete the new management’s plans are, because at the time of the merger they do not have any control to implement them.  Under a two-step merger the valuation is made incorporating the effects of the new management’s plans, as long as they are not speculative.  It seems inequitable to allow a benefit to be conferred on one group of minority shareholders and not another based on a factor the minority has no control over, how the merger is structured.  I believe that in the future the Delaware courts will apply this decision regardless of how the merger is structured as long as the information about the new management’s plans are concrete and not speculative.  But currently this inequity could effect how mergers and acquisitions are implemented in Delaware.

Second, although it was very clear in this case, potential problems exist in determining when new management’s plans are not speculative. The court set out two requirements for making this decision, both of which are vague and ill-defined: 1) the value from the new plans can not be speculative and 2) that the plans have become part of the “operating reality” by the completion of the merger.[12]  It is safe to assume that most acquiring companies when attempting to buy a company that is under performing would have some sort of plan to turn the company around or they would not be making the acquisition.[13]  Now, if this issues comes up it will be up the Delaware Court of Chancery and the parties involved to determine if these vague requirements are fulfilled on a case by case basis.  If this determination becomes a problem the Supreme Court of Delaware will have to clarify this decision.

Business Implications

First, it may discourage two-step mergers from being implemented.  Second, it might force acquiring companies using the two-step merger to make a tender offer in the first step at a substantial premium.[14]  Unless this premium is offered shareholders could perceive a disincentive in tendering their shares during the first step, hoping for a substantial increase in value during the second step.[15]  Third, new management could, to avoid having their plans incorporated into the valuation during a two-step merger, refrain for implementing their plans until the second step of the merger is complete.

Recent law review articles have analyzed these possible business implications and concluded they are unlikely. They argue that this decision although ripe with possible implications will have little impact on how mergers are structured. First, the procedural and financial burdens of the appraisal remedy make it a very inefficient for plaintiffs.[16]  The Delaware appraisal remedy statute forces plaintiffs to jump through extensive procedural hoops and does not allow any money to be paid for the outstanding shares until the proceeding is complete.  This case is a great example, it has taken over 15 years and four appeals to come to any concussion and or for Cede & Co. to get any money for their shares.  Second, the strategic factors for structuring a two-step merger will likely outweigh the implications of this decision.[17] Third, if management was to refrain from implementing their plan until after the merger it could have legal implications on their “fair dealings” as to the minority shareholders and increase the likelihood of further litigation.[18] The authors do feel that one impact will be that acquiring companies will emphasize the first step of the two-step merger by keeping the original tender offer open longer or increasing the tender offer. By doing this the majority reduces the potential pool of appraisal claims.



The latest decision in the saga of Cede & Co. v. Technicolor exemplifies many of the benefits and problems with the Delaware appraisal remedy. The problems include first, the time and cost involved in using the remedy. Second, the courts do not evenly apply the remedy and are not completely clear on many of its implications. But it currently is a good way to protect minority shareholders without adversely affecting the course of business. Because of the recent prevalence of cash-out mergers the appraisal remedy is currently being used more often. Over time the courts should iron out many of the problems in the appraisal remedy and make it more efficient.

[1]Wertheimer v. UPO, 457 A.2d 701, 713 (1983).
[2] Barry M. Wertheimer, The Shareholders’ Appraisal Remedy and How the Courts Determine Fair Value, 47 Duke L.J. 613, 615 (1988).
[3]Id. at 616.
[4]Cede & Co. v. Technicolor, 634 A.2d 345, 357 (1993).
[5]Id. at 358.
[6]Cede & Co. v. Technicolor, 684 A.2d 289, 290 (1996).
[7]Id. at 290 (quoting Cede & Co. v. Technicolor, Inc., 542 A.2d 1182, 1192 (1988)).
[8]Id. at 290.
[9]Id. at 295.
[10] 8 Del. C. § 262.
[11]Id. at 295 (quoting Weinberger v. UOP, Inc., 457 A.2d 701, 713 (1983)).
[12] Justin B. Wienburgh, Cede & Co. v. Technicolor, Inc.: Appraising Dissenters’ Shares: The “Fair Value” of Technicolor, 22 Del. J. Corp. L. 293, 306 (1997).
[13] See Id.
[14] Jesse A. Finklestein and Russell C. Silberglied, Technicolor IV: Appraisal Valuation in a Two-Step Merger, 52 Bus. Law 801, 809 (1997).
[16] See Justin B. Wienburgh, Cede & Co. v. Technicolor, Inc.: Appraising Dissenters’ Shares: The “Fair Value” of Technicolor, 22 Del. J. Corp. L. 293, 308-09 (1997); Jesse A. Finklestein and Russell C. Silberglied, Technicolor IV: Appraisal Valuation in a Two-Step Merger, 52 Bus. Law 801, 807-08 (1997).
[17] See Id.
[18] See Id.