Third Circuit Holds That Pa. Appraisal Statute Does Not Prevent a Dissenting Shareholder from Separately Pursuing Claim for Breach of Fiduciary Duty Post-merger


In deciding an "important issue of Pennsylvania corporate law that the Supreme Court of Pennsylvania has not yet explicitly addressed," the U.S. Court of Appeals for the Third Circuit recently reinstated a dismissed lawsuit and held that minority shareholders who dissented to a merger were not limited to state appraisal proceedings as their sole post-merger remedy. Mitchell Partners, L.P., v. Irex Corp., et al., Nos. 10-4040 and 10-4091 (precedential opinion, August 31, 2011). The Third Circuit predicted that the Supreme Court of Pennsylvania would hold that Pennsylvania's appraisal statute does not prevent a shareholder from pursuing a separate, post-merger lawsuit for breaches of fiduciary duty.1

I. Allegations of the Complaint: Insider Shareholders Purportedly Plan to Acquire Control of the Corporation and to Buy Out Minority Shareholders at an Unfair Price.

In Mitchell Partners, a corporation's president/CEO/chairman allegedly concocted a plan where favored insider shareholders would acquire 100-percent control of the corporation through a merger with a holding company controlled by those insider shareholders. The plaintiff was a substantial minority shareholder (the "Minority Shareholder"), but it was not among the favored insider shareholders. The corporation formed a special committee (the "Special Committee") to review the proposed merger and to negotiate on behalf of all minority shareholders. However, according to the Minority Shareholder, the insider directors influenced and controlled the Special Committee's consideration of fair value for the minority stock in several ways, thereby breaching the fiduciary duties they owed to all minority shareholders.2

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