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City of North Miami Beach General Employees' Retirement Plan v. Dr Pepper Snapple Group, Inc.

Court of Chancery of Delaware

June 1, 2018

CITY OF NORTH MIAMI BEACH GENERAL EMPLOYEES' RETIREMENT PLAN and MAITLAND POLICE OFFICERS AND FIREFIGHTERS RETIREMENT TRUST, on behalf of themselves and all other similarly situated stockholders of Dr Pepper Snapple Group, Inc., Plaintiffs,
v.
DR PEPPER SNAPPLE GROUP, INC., MAPLE PARENT HOLDINGS CORP., SALT MERGER SUB, INC., LARRY YOUNG, DAVID E. ALEXANDER, ANTONIO CARRILLO, JOSÉ M. GUTIÉRREZ, PAMELA H. PATSLEY, RONALD G. ROGERS, WAYNE R. SANDERS, DUNIA A. SHIVE, and M. ANNE SZOSTAK, Defendants.

          Date Submitted: May 25, 2018

          Michael J. Barry, Jeff A. Almeida, and Laina M. Herbert of GRANT & EISENHOFER P.A., Wilmington, Delaware; Mark Lebovitch and John Vielandi of BERNSTEIN LITOWITZ BERGER & GROSSMAN LLP, New York, New York; Counsel for Plaintiffs.

          S. Mark Hurd, Melissa A. DiVincenzo, Eric S. Klinger-Wilensky, and Alexandra Cumings of MORRIS, NICHOLS, ARSHT & TUNNELL LLP, Wilmington, Delaware; Brian A. Herman of MORGAN, LEWIS & BOCKIUS LLP, New York, New York; Jason H. Wilson of MORGAN, LEWIS & BOCKIUS LLP, Philadelphia, Pennsylvania; Counsel for Defendants Dr Pepper Snapple Group, Inc., Salt Merger Sub, Inc., Larry Young, David E. Alexander, Antonio Carrillo, José M. Gutiérrez, Pamela H. Patsley, Ronald G. Rogers, Wayne R. Sanders, Dunia A. Shive, and M. Anne Szostak.

          Paul J. Lockwood, Joseph O. Larkin, Sarah R. Martin, Alyssa S. O'Connell, and Michelle L. Davis of SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP, Wilmington, Delaware; Counsel for Defendant Maple Parent Holdings Corp.

          OPINION

          BOUCHARD, C.

         Earlier this year, Dr Pepper Snapple Group, Inc. and Keurig Green Mountain, Inc. announced an agreement to combine their businesses to create a more diversified beverage company. The transaction is structured so that Keurig will become an indirect wholly-owned subsidiary of Dr Pepper through a reverse triangular merger. Dr Pepper stockholders will receive $103.75 per share in a special cash dividend and will retain their shares of Dr Pepper, which will account for 13% of the shares of the combined company. The indirect owners of Keurig will receive shares of Dr Pepper and will hold the remaining 87% of the equity of the combined company.

         Dr Pepper stockholders are not being asked to approve the merger, which combines a merger subsidiary of Dr Pepper with the parent of Keurig. But they are being asked to approve two proposals necessary to effectuate the transaction at a stockholders meeting scheduled for June 29, 2018.

         On March 8, 2018, Dr Pepper issued a preliminary proxy statement for the stockholders meeting. It states that Dr Pepper stockholders will not have appraisal rights under Section 262 of the Delaware General Corporation Law in connection with the proposed transaction. That filing prompted two stockholder plaintiffs to file this action in which they assert that Dr Pepper stockholders "ought" to be afforded appraisal rights in connection with the proposed transaction.

         The parties agree that "this action concerns a purely legal question"[1]concerning the availability of appraisal rights under Section 262. They have filed cross-motions for summary judgment, requesting a decision before the upcoming stockholders meeting.

         Section 262 affords stockholders of Delaware corporations a statutory remedy for appraisal of their shares in certain defined circumstances. Relevant here, Section 262(b) expressly provides that appraisal rights shall be available only for the shares of stock of a "constituent corporation" in a merger or consolidation to be effected pursuant to certain provisions of the General Corporation Law. The three-step process for determining a stockholder's entitlement to appraisal under Section 262(b) also contemplates that the stockholder will relinquish its shares in the merger or consolidation.

         For the reasons explained below, the court holds that the term "constituent corporation" as used in Section 262 means an entity actually being merged or combined and not the parent of such an entity. Based on that construction, the court concludes that Dr Pepper's stockholders do not have a statutory right to appraisal under Section 262(b) because Dr Pepper is not a constituent corporation. Instead, Dr Pepper is simply the parent of one of the two corporations that will be merged in connection with the proposed transaction.

         As a second ground for its decision, the court concludes that Dr Pepper stockholders are not entitled to appraisal because they are retaining their shares in connection with the proposed transaction. This type of transaction does not fit the statutory scheme of Section 262(b), which contemplates that the shares for which appraisal is sought will be relinquished in a merger or consolidation.

         Based on these conclusions, defendants' motions for summary judgment will be granted, and plaintiffs' motion for summary judgment will be denied.

         I. BACKGROUND

         The facts recited herein are based on the uncontroverted allegations of the Verified Class Action Complaint (the "Complaint")[2] and certain documents filed with the Securities and Exchange Commission that were cited in the parties' submissions in connection with their cross-motions for summary judgment.[3]

         A. The Parties and Relevant Non-Parties

         Defendant Dr Pepper Snapple Group, Inc. ("Dr Pepper") is a publicly traded corporation that produces and sells more than fifty brands of flavored beverages throughout North America and the Caribbean.[4] Defendant Salt Merger Sub, Inc. ("Merger Sub") is a wholly-owned subsidiary of Dr Pepper that was formed solely for the purpose of facilitating the transactions described herein.[5] The nine individual defendants comprise Dr Pepper's board of directors: Larry Young, David E. Alexander, Antonio Carrillo, José M. Gutiérrez, Pamela H. Patsley, Ronald G. Rogers, Wayne R. Sanders, Dunia A. Shive, and M. Anne Szostak.[6]

         Defendant Maple Parent Holdings Corp. ("Maple Parent") is a private entity that indirectly owns non-party Keurig Green Mountain, Inc., a leader in specialty coffee and single-serve brewing systems.[7] Non-party JAB Holdings Company S.à r.l. ("JAB") controls Maple Parent.[8]

         Plaintiffs City of North Miami Beach General Employees' Retirement Plan and Maitland Police Officers and Firefighters Retirement Trust purportedly hold an undisclosed number of shares of Dr Pepper common stock.[9]

         B. The Proposed Transactions

         On January 29, 2018, Dr Pepper, Maple Parent, and Merger Sub entered an Agreement and Plan of Merger (the "Merger Agreement").[10] Under the Merger Agreement, Merger Sub will merge "with and into Maple Parent, " with Maple Parent surviving the transaction as a wholly-owned subsidiary of Dr Pepper (the "Merger").[11] Each share of Merger Sub common stock will be converted into one share of the surviving corporation (i.e., Maple Parent), and each share of Maple Parent common stock will be converted into the right to receive shares of newly-issued Dr Pepper common stock determined pursuant to an exchange ratio set forth in the Merger Agreement.[12] Before the closing of the Merger, Maple Parent will declare a $9 billion cash dividend to Dr Pepper.[13]

         If completed, the equity holders of Maple Parent immediately before the effective time of the Merger (the "Effective Time") will own approximately 87% of Dr Pepper's common stock immediately after the Effective Time.[14] The public stockholders of Dr Pepper immediately before the Effective Time will retain their shares and own approximately 13% of Dr Pepper after the Merger.[15] After the Merger, JAB will be Dr Pepper's controlling stockholder.[16]

         The Merger is depicted in the diagram below:[17]

         (Image Omitted.)

         Dr Pepper plans to declare a special cash dividend to its stockholders of record as of the business day immediately preceding the closing of the Merger, entitling them to $103.75 per share, payable one business day after the Effective Time (the "Special Dividend").[18] Dr Pepper expects to fund the Special Dividend with funds secured from third-party financing sources and the $9 billion dividend it will receive from Maple Parent.[19] The post-Merger entity and Special Dividend are depicted in the diagram below:

         (Image Omitted.)

         C. The Charter Amendment and Share Issuance Proposals

         Dr Pepper's stockholders are not being asked to vote to approve the Merger. Rather, as described in a preliminary proxy statement filed with the SEC on March 8, 2018 (the "Preliminary Proxy"), Dr Pepper's stockholders will vote on two proposals necessary to effectuate the transactions contemplated by the Merger Agreement at a stockholders meeting to be held on June 29, 2018.[20] First, Dr Pepper's stockholders will "vote on a proposal to approve the issuance of [Dr Pepper] common stock as merger consideration pursuant to the [Merger Agreement]" (the "Share Issuance Proposal").[21] Second, Dr Pepper's stockholders will "vote on a proposal to approve an amendment to the certificate of incorporation of [Dr Pepper] to provide for [] an increase in authorized shares to permit issuance of a sufficient number of shares as merger consideration" (the "Charter Amendment Proposal").[22] The Merger only can be consummated, and stockholders only will receive the Special Dividend if Dr Pepper's stockholders approve both the Share Issuance and Charter Amendment Proposals.[23]

         The Preliminary Proxy informs Dr Pepper's stockholders that they do not have appraisal rights in connection with the Merger. Specifically, it states that "Section 262 of the DGCL does not provide for appraisal rights in connection with the transactions contemplated by the merger agreement for holders of shares of [Dr Pepper] common stock."[24]

         II. PROCEDURAL HISTORY

         Plaintiffs filed the Complaint on March 28, 2018, asserting two claims. Count I asserts that the individual defendants breached their fiduciary duties by failing to inform Dr Pepper's stockholders that they have appraisal rights in connection with the Merger.[25] Count II asserts that 8 Del. C. § 262(d)(1) was violated because the Preliminary Proxy did not inform stockholders of the availability of appraisal rights.[26] Plaintiffs ask the court to "[e]njoin the Proposed Transaction until Plaintiffs and the Class are provided their rights under 8 Del. C. § 262, or alternatively permit class members to demand and petition this Court for appraisal."[27]

         On April 30, 2018, Maple Parent and Dr Pepper each filed a motion for summary judgment under Court of Chancery Rule 56.[28] On May 1, 2018, plaintiffs filed a cross-motion for summary judgment.[29] Briefing was completed on May 18, 2018, and the court heard argument on the motions on May 25, 2018.

         III. ANALYSIS

         This action boils down to the purely legal question of whether Dr Pepper's stockholders have appraisal rights in connection with the Merger under 8 Del. C. § 262. For the reasons explained below, I find that they do not. Thus, the motions for summary judgment of Dr Pepper and Maple Parent will be granted, and plaintiffs' motion will be denied.

         A. Summary Judgment Standard

         Under Court of Chancery Rule 56(c), summary judgment "shall be rendered forthwith if the pleadings, depositions, answers to interrogatories and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law."[30]The parties have filed cross-motions and agree that there is no genuine issue as to any material fact that would preclude the court from granting summary judgment.[31]Thus, under Court of Chancery Rule 56(h), "the Court shall deem the motions to be the equivalent of a stipulation for decision on the merits based on the record submitted with the motions."[32]

         B. Dr Pepper's Stockholders are not Entitled to Appraisal Rights Under 8 Del. C. § 262

         "Under Delaware law, the appraisal remedy is entirely a creature of statute."[33]"The goal of statutory construction is to determine and give effect to legislative intent."[34] Thus, "[t]he plain meaning of the statutory language controls if the statute is found to be clear and unambiguous" and, "[i]f a statutory provision is ambiguous, " the court should "consider the statute as a whole, rather than in parts, to produce a harmonious interpretation of a given provision."[35] In either event, "it is a well established principle of statutory interpretation that the law favors rational and sensible construction."[36]

         As explained below, Dr Pepper's stockholders are not entitled to appraisal of their shares in connection with the Merger because the statutory requirements plainly enumerated in Section 262 have not been met for two reasons that are corroborative of each other: (i) Dr Pepper is not a "constituent corporation" in the Merger as required under Section 262(b) in order to trigger a right to appraisal, and (ii) stockholders of Dr Pepper are retaining their shares in connection with the Merger.

         1. Dr Pepper's Stockholders are not Entitled to Appraisal Rights because Dr Pepper is not a Constituent Corporation in the Merger

         Section 262(b) imposes a threshold requirement for determining when appraisal rights are available in connection with a merger or consolidation effected under the Delaware General Corporation Law:

Appraisal rights shall be available for the shares of any class or series of stock of a constituent corporation in a merger or consolidation to be effected pursuant to § 251 . . ., § 252, § 254, § 255, § 256, § 257, § 258, § 263 or § 264 of this title . . .[37]

         Thus, as a statutory matter, appraisal is available in a merger or consolidation governed by Section 262(b) only for the stock of a "constituent corporation."[38]

         The Delaware General Corporation Law does not explicitly define the term "constituent corporation, " but a number of its provisions give insight into the meaning of the term. Together, they clearly imply that "constituent corporations" are entities that actually were merged or combined in the transaction and not a parent of such entities.

         For example, Section 251(a) provides: "Any 2 or more corporations of this State may merge into a single surviving corporation, which may be any 1 of the constituent corporations or may consolidate into a new resulting corporation formed by the consolidation."[39] Because this statute provides that the entity surviving a merger may be either (i) a "new resulting" entity of a consolidation or (ii) one of two or more "constituent corporations" to a merger, the term "constituent corporations" must mean the corporations actually being merged or consolidated.

         Similarly, Section 262(b)(1)(ii) states that "no appraisal rights shall be available for any shares of stock of the constituent corporation surviving a merger if the merger did not require for its approval the vote of the stockholders of the surviving corporation as provided in § 251(f) in this title."[40] Logically, for a constituent corporation to "survive" a merger, the constituent corporation must be an entity preexisting the merger that was combined with another entity in the transaction.

         In the same vein, this court has interpreted the term "constituent corporations" to mean only those legal entities actually being combined in a transaction. Specifically, in In re Inergy L.P. Unitholder Litig., [41] the court considered whether the unitholders of a limited partnership (Inergy) were entitled to vote on a proposed merger under Inergy's partnership agreement. The court explained that the answer "turns on whether Inergy is actively 'merging' or 'consolidating' with another entity so that it is a constituent party to such merger or consolidation."[42] Although Inergy was a contractual party to the merger agreement, the court concluded that it was "clear" that Inergy was "not a constituent of the merger between Holdings and MergerCo."[43] Accordingly, the court found that Inergy's unitholders were unlikely to succeed on their claim that they were entitled to vote on the merger.

         In analyzing the issue, the Inergy court analogized to the use of triangular mergers in the corporate context, i.e., where "a parent corporation can acquire a target corporation by setting up a subsidiary to merge with the target."[44] The court explained that the "effect of this arrangement is that the parent does not become a constituent to the merger between the target and the subsidiary" and thus the stockholders of the parent "generally are not entitled to vote on the merger."[45] This conclusion is consistent with this court's observation in Lewis v. Ward that the stockholders of a parent corporation of a merging subsidiary in a triangular merger "generally do not have the right to vote on the merger, nor are they entitled to appraisal."[46]

         The authorities discussed above support interpreting the term "constituent corporation" in Section 262 to mean only an entity that actually is being merged or combined with another entity in a merger or consolidation and thus does not include a parent of such entities. This interpretation is consistent with how this court and leading Delaware corporate law treatises have understood the term, albeit without specifically analyzing the issue.[47]

         Tellingly, plaintiffs did not advance an alternative interpretation of the term "constituent corporation" in their briefs.[48] Instead, relying heavily on dictum in Hollinger Inc. v. Hollinger International, Inc.,[49] plaintiffs argue that Dr Pepper simply "ought" to be considered a constituent corporation even though it is not being ...


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