Pennsylvania Stockholders Bear the Burden in Freeze-Out Mergers

As the result of an opinion recently issued by the Pennsylvania Supreme Court, minority stockholders whose shares in Pennsylvania corporations are to be exchanged for cash in freeze-out mergers have limited recourse beyond a judicial appraisal of their shares after the merger closes. In Mitchell Partners v. Irex. (July 24, 2012), the Supreme Court held that in the absence of “exceptional circumstances” amounting to fraud or “fundamental unfairness,” minority shareholders are precluded from bringing suit against corporate directors, officers or majority shareholders for breach of fiduciary duties and other common law claims. The court did recognize an exception, however, where a stockholder is able to demonstrate fraud or fundamental unfairness that cannot be compensated through the statutory appraisal process.

Mitchell Partners was presented to the Pennsylvania Supreme Court on a certified question from the U.S. Court of Appeals for the Third Circuit regarding the interpretation of Section 1105 of the Pennsylvania Business Corporation Law. It was clear that Section 1105 bars stockholders from seeking injunctions against proposed mergers in the absence of “fraud or fundamental unfairness,” but it was unclear how Section 1105 affects post-merger stockholder actions.

BCL Section 1105