Delaware Court of Chancery Rules that Corporations Seeking Written Consent of Stockholders to Mergers Must Give Notice of Appraisal Rights Twice, with the Second Notice Triggering the 20-Day Period to Demand Appraisal
By James G. McMillan, III, Esq.
Under the Delaware appraisal statute, stockholders of Delaware corporations who do not vote in favor of a merger may demand appraisal of their shares by the Delaware Court of Chancery. In order to exercise appraisal rights, stockholders must “perfect” their appraisal rights by demanding appraisal from the corporation within a prescribed 20-day period. In Flinn Flexer v. Runtriz, Inc., C.A. No. 2022-1020-NAC, Vice Chancellor Nathan A. Cook of the Delaware Court of Chancery held that under 8 Del. C. § 262, where the merger is approved by written consent of the stockholders, the 20-day period begins to run from the date that the corporation provides notice to stockholders that the merger has been approved.
On June 30, 2022, Runtriz, Inc. emailed a notice titled Confidential Information Statement to its stockholders that its board of directors had approved a merger of the corporation with and into Radius Networks, Inc. The notice sought the written consents of stockholders to the merger, and advised them of their appraisal rights under Section 262 of the Delaware General Corporation Law (DGCL).
On July 13, 2022, Runtriz’s Chief Executive Officer sent a letter by email to stockholders informing them that the merger had been approved by written consent of stockholders. The letter did not inform the stockholders of their appraisal rights or include a copy of the statute. On July 14, 2022, Runtriz filed a certificate of merger with the Delaware Secretary of State, making the merger effective.
On August 2, 2022, Flinn Flexer, a record stockholder in Runtriz, sent an appraisal demand to the corporation. The date was 20 days after the letter giving notice of stockholder approval, but 32 days after the Confidential Information Statement.
Flexer filed his petition for appraisal in the Court of Chancery on November 10, 2022. Runtriz sought dismissal, arguing that Flexer failed to perfect his appraisal rights because he served his appraisal demand more than 20 days after the Confidential Information Statement was issued.
Runtriz noted that Section 262(d)(1)—mergers approved by vote at stockholder meeting—requires notice of appraisal rights not less than 20 days before the meeting. Based on that requirement, Runtriz argued that the notice of appraisal rights had to be given at least 20 days before solicitation of the written consent.
Vice Chancellor Cook rejected Runtriz’s argument, finding that “the drafters of Delaware’s appraisal statute unambiguously chose to treat the procedures for making an appraisal demand in connection with a merger approved by the written consent of stockholders differently from a merger approved at a stockholders meeting.” The Court pointed out that Section 262(d)(1) “uses forward-looking language—it addresses a merger that ‘is to be submitted for approval at a meeting of the stockholders.’ In contrast, Section 262(d)(2) uses past tense language—it addresses a merger that ‘was approved [by written consent] pursuant to Section 228.’” The Court concluded that “Section 262(d)(2) requires that the triggering notice be provided after the merger was approved by stockholders through written consent.” The Court found that this interpretation is consistent with Section 228(e) of the DGCL, which requires notice to stockholders of action having been taken by written consent of stockholders.
Thus, where a corporation seeks approval of a merger by written consent of stockholders, it must provide two notices of appraisal rights. The first, under basic disclosure law, when it solicits written consent, and the second under DCGL Section 262(d)(2) when it provides notice of stockholder approval. The 20-day clock does not begin running until the second notice has been given.
Petitioner Flinn Flexer is represented by the author and by Theodore A. Kittila, Esquire, of Halloran Farkas + Kittila LLP.