The special committee worked with its financial advisor and management to value Orchard's common stock, which depended in large part on the treatment of the Series A stock. The Series A was not particularly robust and, by the terms of the certificate of designations, only participated on an as-converted basis in any dividend or distribution, without any preferential cash-flow rights. The Series A did carry a $25 million liquidation preference that would be triggered by a voluntary or involuntary liquidation, dissolution or winding up of Orchard. However, the Series A was not participating preferred, meaning that after the payment of the liquidation preference, only the common stockholders would receive Orchard's remaining assets and funds. The valuation of the common stock therefore hinged on whether the proposed squeeze-out transaction triggered payment of the liquidation preference. If it did, the payment would account for 70% of the company's going-concern value, rather than 19% if (properly) valued on an as-converted basis.

The financial advisor initially valued the common stock on the assumption that the Series A would pay in a squeeze-out transaction on an as-converted basis, reading the Series A certificate of designations as excluding a squeeze-out from the terms of the liquidation preference. The common stock was therefore valued at $4.84 per share, far above the price offered by Dimensional.

Shortly after receiving the advisor's valuation, Tuhin Roy, a former executive of Orchard's predecessor company, submitted a cash-and-stock proposal with a financing condition. Donahue informed Stein of this proposal, to which Stein responded that Dimensional would be willing to sell to a third party as long as it received the full $25 million liquidation preference for the Series A. Based on this representation, the special committee authorized Roy to negotiate with Dimensional directly. Dimensional also negotiated with other third-party bidders, one of which was directed to Dimensional by the special committee.

A few weeks later, Stein informed Donahue that Dimensional was not interested in Roy's bid because of the financing contingency and Roy's unwillingness to pay the full liquidation preference. Roy eventually withdrew his bid, citing his inability to come to an agreement with the special committee. Roy's letter to the special committee implied that Dimensional had not only asked for the face value of the Series A, but for a premium above the liquidation preference.

The special committee later agreed that it would recommend the transaction with Dimensional on three conditions:

Stein, representing Dimensional, eventually countered with a choice of either $2.00 per share with the go-shop and majority-of-the-minority condition, or $2.10 per share with the go-shop but no majority-of-the-minority condition. The parties ultimately agreed to split the difference with a price of $2.05 per share and both deal-protection measures. The special committee accepted the offer after the financial advisor changed its valuation model to value the Series A at its liquidation preference, which changed the value of the common stock to between $2.00 and $2.10 per share. At a later appraisal proceeding, the financial advisor testified that he had changed his valuation model because the special committee instructed him to do so. The fairness opinion itself disclaimed any independent valuation of the Series A.

During the go-shop period, the special committee contacted 23 strategic bidders and 12 financial bidders, but no formal proposals were submitted. Roy submitted a revised proposal, but the special committee determined that the proposal's financing contingency made it unlikely to lead to a superior proposal.

Ahead of the stockholder vote, Orchard issued a proxy statement recommending that the stockholders approve both:

The proxy statement incorrectly stated in the Notice of Stockholder Meeting that without the amendment, the Series A would receive its full liquidation preference in the merger. The proxy statement also erred in its description of the financial advisor's analysis, stating that the amendment would make inapplicable the liquidation preference, even though the liquidation preference was never applicable to a squeeze-out in the first place. Other sections of the proxy statement, however, accurately described the terms of the Series A.

The merger and certificate amendment were both approved at a stockholder meeting by a majority of the unaffiliated shares. The merger closed on the same day.

Shortly before the stockholder meeting, Donahue contacted Orchard's interim CEO about consulting for Orchard after the merger closed. He was reimbursed for immediate post-merger consulting work, and later entered into a consulting agreement with Orchard.

Almost two years after the merger closed, Orchard merged with a Sony Music entity and certain Orchard stockholders sought an appraisal. At the appraisal hearing, then-Chancellor Strine ruled that the fair value of the common stock was $4.67 per share.

Soon after the appraisal ruling, the plaintiff stockholders filed an action for breach of fiduciary duty. On motion for summary judgment, the plaintiffs claimed that:

The defendants, in addition to contesting these claims, argued for summary judgment on the following issues:

The court began its discussion of the claim of erroneous disclosure by describing the standard of materiality for disclosure. The court noted that under Delaware Supreme Court precedent, a fact is material if "there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote." Notably, this does not require a showing that disclosure "would have caused the reasonable investor to change his vote." Rather, the inquiry is whether there is a substantial likelihood that the disclosure "would have been viewed by the reasonable investor as having significantly altered the 'total mix' of information made available." (Rosenblatt v. Getty Oil Co., 493 A.2d 929, 944 (Del. 1985).)

With that standard in mind, the court found that the erroneous disclosure regarding the liquidation preference in the Notice of Stockholder Meeting was material as a matter of law because the disclosure was mandated by the section of the DGCL that requires a summary of any changes proposed to be made to a company's certificate of incorporation (8 Del. C. § 242(b)(1)). The court noted that under Delaware law, any information required by the DGCL to be disclosed is material per se. The court found that even though the information was correctly stated in other parts of the proxy statement, such as the opening letter from the special committee chairperson, the fact that it was misstated in a legally required section made the incorrect disclosure material as a matter of law.

The court denied the plaintiffs' motion for summary judgment on other disclosure violations, but held that triable issues of fact remained. These included:

Regarding the disclosure of Roy's bid and withdrawal, the court noted that if the plaintiffs' account is correct, the omission of Dimensional's true negotiating position would be considered materially misleading. Under Arnold II, the omission of key information about a competing bid is material, even if the bid is highly speculative and contingent, if the proxy statement contains partial and incomplete disclosures about the bidding history (Arnold v. Soc'y for Sav. Bancorp, Inc., 650 A.2d 1270, 1290-81 (Del. 1994)). Here, the proxy statement had disclosed that Dimensional was willing to sell to a third party if the liquidation preference were paid in full, which the proxy statement cited as evidence of the squeeze-out transaction's fairness. If Dimensional had not been that open to third-party offers, it would undermine both the go-shop and the special committee's effectiveness, and be material to the stockholders.

The court held that at trial, the entire fairness standard, rather than the business judgment rule, would be applied. In reaching this decision, the court followed its own reasoning in In re MFW Shareholders Litigation, 67 A.3d 496 (Del. Ch. 2013), affirmed by the Delaware Supreme Court two weeks after the Orchard decision in Kahn v. M & F Worldwide Corp., C.A. No. 6566, (Del. Mar. 14, 2014). The MFW court had held that the board of directors of the target company in a controlling-stockholder transaction is entitled to the presumptions of the business judgment rule if the controlling stockholder, when it made its offer, conditioned its offer on both:

For more on the Delaware Supreme Court's holding affirming MFW, see Legal Update, Kahn v. M & F Worldwide: Delaware Supreme Court Upholds Chancery Decision in MFW, but Opens Door to Challenges Against Controller Mergers.

In Orchard, the court held that in spite of the facially robust powers granted to the special committee, neither condition was met at the outset of negotiations. Consequently, the court held that business judgment would not be available under MFW and that the burden of persuasion would remain on the defendants under Kahn v. Lynch. For more on entire fairness and burden-shifting, see Practice Note, Going Private Transactions: Overview: Procedural Safeguards.

In reaching this decision, the court reiterated several of its findings regarding the erroneous disclosures and other factual disputes that raised doubts as to both the special committee's independence and effectiveness and the accuracy of the information provided to the stockholders. In particular, the court highlighted:

The court also emphasized the special committee's informational gap regarding Dimensional's true intentions about selling to a third party only for a premium above the liquidation preference. Here the court explained that under Kahn v. Tremont Corp., the special committee is only effective if the controlling stockholder discloses all material facts surrounding the transaction ( (Del. Ch. Mar. 21, 1996)). Under Tremont, the controlling stockholder must reveal all material terms of the proposal, including facts relating to the market value of the subject matter of the proposed transaction, leaving out only the price at which it would buy or sell and how it would finance a purchase or invest the proceeds of a sale. As a result of the special committee's incorrect understanding of the type of third-party bid that Dimensional would consider, the committee allowed third parties to negotiate with Dimensional instead of leading those negotiations itself, confident that the go-shop would confirm the fairness of the merger.

The defendant directors argued that even if they had breached their fiduciary duties, they were exculpated from liability under Orchard's certificate of incorporation. The exculpatory clause stated the following:

Under Section 102(b)(7) of the DGCL, a Delaware corporation can only exculpate directors for breaches of the fiduciary duty of care, not the duty of loyalty (8 Del. C. § 102(b)(7)). Because the court had already found questions about the directors' interests that necessitated entire-fairness review, it could not summarily absolve the directors under Section 102(b)(7). Rather, the court would conduct a trial, determine whether the transaction was entirely fair, and if not, then identify whether breaches of fiduciary duty were the reason why the transaction was not entirely fair. Exculpation would then only be available if it were established that these breaches were only breaches of the duty of care, not loyalty. For purposes of summary judgment, however, the Section 102(b)(7) defense is only available if the case is governed by the business judgment rule.

The court added that even though it could not exculpate the directors before trial in an entire-fairness case, this did not mean that the directors could not eventually benefit from the exculpation provision. The court cited two cases in which a Section 102(b)(7) provision exculpated directors in a transaction that failed to meet entire fairness. However, that determination was premature to make before trial.

The Dimensional defendants argued for a holding on summary judgment that the plaintiff cannot, under any circumstances, obtain an award of rescissory damages.

Rescissory damages are the monetary equivalent of the equitable remedy of rescission and can be awarded when actual rescission of a completed transaction may be impractical (for more on the remedy of rescission, see Practice Note, Contracts: Equitable Remedies: Rescission and Restitution). The remedy is available for breaches of the duty of loyalty and seeks to restore the plaintiff to its prior position by disgorging the defendant's wrongfully obtained profits. Prior Delaware Supreme Court decisions have held that rescissory damages are an appropriate measure of damages in controlling-stockholder squeeze-outs (see Lynch v. Vickers Energy Corp., 429 A.2d 497, 501 (Del. 1981); Weinberger v. UOP, Inc., 457 A.2d 701, 714 (Del. 1983)).

Dimensional argued that rescissory damages must be unavailable because two years had passed since the closing, and the subsequent sale to Sony Music could not be used as a valuation indicator for rescissory damages. The court rejected this argument, noting the precedent in Vickers and Weinberger in which rescissory damages were awarded years after the underlying transactions closed. As the court explained, the rationale for the award of rescissory damages so long after the transaction is precisely that it substitutes for rescission itself when that remedy is no longer practical.

The court acknowledged the argument that a delay can result in a windfall for plaintiffs, who can wait to see how the transaction plays out before filing suit. Mitigating against this, however, is the degree to which the party opposing the remedy bears responsibility for the delay. This is an issue to be determined at trial and prevents a ruling that rescissory damages cannot be awarded.

The defendants contended that quasi-appraisal should be declared unavailable to the plaintiffs. "Quasi-appraisal" is a short-hand description of the damages that are awarded as the equivalent of what a stockholder would have received in an appraisal, namely the fair value of the stockholder's proportionate share of the equity of the corporation as a going concern.

The Dimensional defendants argued that quasi-appraisal can only be awarded in a short-form merger when disclosure violations interfere with the ability of minority stockholders to seek statutory appraisal. The special committee defendants added that quasi-appraisal can be available in a long-form merger with a majority stockholder where the vote is a fait accompli because agency costs are high and market competition is distorted.

The court rejected these constructions of the quasi-appraisal remedy, explaining that quasi-appraisal damages have traditionally been available when a fiduciary breaches its duty of disclosure in connection with a transaction that requires a stockholder vote. Without the disclosure of false or misleading information, or the failure to disclose material information, the stockholders could have voted down the transaction and retained their proportionate share of the equity in the corporation as a going concern. While early cases applied the remedy to controlling-stockholder transactions, its availability was expanded in Arnold III, which involved an arms'-length, third-party, stock-for-stock merger (Arnold v. Soc’y for Sav. Bancorp, Inc., (Del. Ch. June 15, 1995), aff'd, 678 A.2d 533 (Del. 1996)). Arnold III and subsequent decisions showed that the remedy is not limited to short-form mergers.

The court also discussed the Berger v. Pubco Corp. decision, which demonstrated that quasi-appraisal was an appropriate remedy for disclosure violations (976 A.2d 132 (Del. 2009)); see Legal Update, Delaware Court Clarifies Remedy for Minority Stockholders for Breach of Duty of Disclosure in Short-form Merger). Although Berger involved a short-form merger, the court held that the analysis in that decision was applicable to long-form mergers as well.

Because an appraisal decision had already determined that the intrinsic value of the Orchard common stock was $4.67 per share, while the merger consideration was $2.05 per share, the court held that the measure of quasi-appraisal damages would be $2.62 per share. The determination of which defendants are liable for that award would be determined after trial on an individual basis in light of the Section 102(b)(7) defense and the reliance on experts defense under Section 141(e) of the DGCL (8 Del. C. § 141(e)).

Finally, the defendants argued that under Transkaryotic, monetary damages for a breach of the duty of disclosure cannot be awarded after a merger closes. The court held that the ruling in Transkaryotic is not that broad.

In Transkaryotic, the court sought to encourage plaintiffs to bring disclosure claims before the stockholder vote so that any additional information that the litigation produced would be provided to the other stockholders. However, the court here held that Transkaryotic does not apply when the claims touch on issues of loyalty. Monetary relief therefore remains a possible remedy, even under Transkaryotic.