ASSIGNMENT
1.Kemp & Beatley was a company incorporated under the laws of New York. Eight shareholders held the corporation’s outstanding one thousand five hundred shares of stock. Petitioners Dissin and Gardstein together owned 20.33 percent of the stock, and each had been a longtime employee of the corporation. Kemp & Beatley had a long-standing practice of awarding compensation bonuses based upon stock ownership. However, when the policy was changed in 2015 to compensation based on service to the corporation, not on stock ownership, Dissin resigned. The company terminated Gardstein in 2016. Dissin and Gardstein brought a suit in 2017, seeking involuntary dissolution of the corporation and alleging that the corporation’s board of directors had acted in a “fraudulent and oppressive” manner toward them, rendering their stock virtually worthless and frustrating their “reasonable expectations” regarding this business venture. What result? Explain.
2. In early 1984, Royal Dutch Petroleum Company (Royal Dutch), through various subsidiaries, controlled approximately 70 percent of the outstanding common shares of Shell Oil Co. (Shell). On January 24, 1984, Royal Dutch announced its intention to merge Shell into SPNV Holdings, Inc. (Holdings), which is now Shell Petroleum, Inc., by offering the minority shareholders $55 per share. Shell’s board of directors, however, rejected the offer as inadequate. Royal Dutch then withdrew the merger proposal and initiated a tender offer at $58 per share. As a result of the tender offer, Holdings’ ownership interest increased to 94.6 percent of Shell’s outstanding stock. Holdings then initiated a short-form merger. Under the terms of the merger, Shell’s minority stockholders were to receive $58 per share. However, if before July 1, 1985, a shareholder waived his right to seek an appraisal, he would receive an extra $2 per share. In conjunction with the short- form merger, Holdings distributed several documents to the minority, including a document entitled “Certain Information About Shell” (CIAS).
The CIAS included a table of discounted future net cash flows (DCF) for Shell’s oil and gas reserves. However, due to a computer programming error, the DCF failed to account for the cash flows from approximately 295 million barrel equivalents of U.S. proved oil and gas reserves. Shell’s failure to include the reserves in its calculations resulted in an understatement of its DCF of approximately $993 million to $1.1 billion, or $3 to $3.45 per share. Moreover, as a result of the error, Shell stated in the CIAS that there had been a slight decline in the value of its oil and gas reserves from 1984 to 1985. When properly calculated, the value of the reserves had actually increased over that time period. Shell’s minority shareholders sued in the Court of Chancery, asserting that the error in the DCF along with other alleged disclosure violations constituted a breach of Holdings’ fiduciary “duty of candor.” Was the error in the DCF material and misleading? Explain.
3. McLoon, Morse Bros., and T-M Oil Companies were closely held companies entirely owned by members of the Pescosolido family, under the leadership of Carl Pescosolido, Sr. His sons, Carl Jr. and Richard, each held shares in McLoon, Morse Bros., and T-M. Together, their shares constituted 50 percent of the McLoon and Morse Bros. common stock and 14.3 percent of the T-M common stock. Carl Sr. proposed to merge all of the family-held companies into Lido Inc., over which he would exercise sole voting control. Carl Jr. and Richard (the dissenters) objected in writing to the proposed merger. The parties executed a merger agreement in which the dissenters expressly preserved their statutory appraisal rights. The dissenters individually wrote to each of the three Maine companies and requested payment for their shares. Lido responded by offering each dissenter an amount that both dissenters rejected.
The dissenters filed a suit for valuation of their stock in all three companies. The referee held that the fair value of each dissenter’s stock was his proportionate share of the full value of each company, as determined from the expert testimony. The fair value thus determined was 2.6 times the amount that Lido had offered. Lido objected to the report, contending that the referee should discount the full value of each company because of the minority status and lack of marketability of the dissenters’ stock. Explain whether the court should accept the referee’s report.
