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Standard learning has long held that a minority shareholder of a
Pennsylvania corporation who was deprived of his stock by a
"cash-out" or "squeeze-out" merger had no
remedy after the merger was completed other than to take what the
merger gave or demand statutory appraisal and be paid the
"fair value" for his shares. No other post-merger remedy,
whether based in statute or common law, was thought to be available
to a minority shareholder to address the actions of the majority in
a "squeeze-out." Now, after the Pennsylvania Supreme
Court's holding in Mitchell Partners, L.P. v. Irex
Corporation, minority shareholders may pursue common law
claims on the basis of fraud or fundamental unfairness against the
majority shareholders that squeezed them out.
Prior to the Pennsylvania Supreme Court's decision, the
Third Circuit turned this long-standing view of Pennsylvania law on
end with its Mitchell Partners, L.P. v. Irex Corporation
opinion of late 2011. In that case, the Court held that
Pennsylvania's Business Corporation Law does not bar recovery
based on common law claims following a cash-out merger. The Court
reasoned that "barring [post-merger suits] would do little
more than insulate alleged tortfeasors from responsibility for
their conduct." After a motion for rehearing from the
defendants, and some added pressure from the Governor of
Pennsylvania in the form of an amicus brief, the Third Circuit
granted rehearing and certified the question at hand to the
Pennsylvania Supreme Court. The specific inquiry was "Does 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?"
The Pennsylvania Supreme Court granted the requested
certification of the question. Following oral argument, the Supreme
Court issued an opinion which agreed with much of the reasoning of
the Third Circuit while limiting the extent of its original
holding. The Supreme Court held that there are remedies available
to a minority shareholder in Pennsylvania after the merger in the
event of fraud or fundamental unfairness. The opinion, along with
the concurrence, was careful to point out that this exception to
the rule of exclusivity should not be invoked lightly. The
exception does not allow a minority shareholder to pursue a common
law claim based solely on the nature of the squeeze-out or on an
allegation that the majority inadequately compensated the minority
for its shares.
This change moves the law of the Commonwealth of Pennsylvania
closer to that of the State of Delaware which, like many other
jurisdictions across the United States, allows for post-merger
remedies other than appraisal rights. Those considering pursuing a
cash-out merger must now address the potential of post-merger
claims in every stage of planning. Schnader's Corporate and
Finance Practice Group, along with Schnader's Litigation
Department, have extensive experience addressing such issues.
Should your circumstances require counsel to plan or react to a
squeeze-out merger, Schnader attorneys are here to help.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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