A recent Pennsylvania court decision has clarified that minority shareholders who are "squeezed out" of their ownership interests in a corporation as a result of a merger can file a lawsuit in opposition to the merger in exceptional circumstances.
A 1980 court decision set the precedent that, under the Pennsylvania Business Corporation Law of 1933, dissenting shareholders were barred from taking any legal action post-merger other than filing for a judicial appraisal to ensure a fair value for their cashed-out shares.
In 1988, the Business Corporation Law was amended to state that judicial appraisal was the "exclusive" remedy for minority shareholders who opposed a merger, but added the phrase, "absent fraud or fundamental unfairness."
But now a recent decision handed down by the Pennsylvania Supreme Court concludes that, in cases of fraud or fundamental unfairness, minority shareholders can pursue post-merger claims beyond an appraisal of the share value, based on the 1988 revision to the law.
Still, minority shareholders should be forewarned: the court made it clear that the exception for fraud or fundamental unfairness is very narrow, and the shareholder bears the burden of proof in such cases.
Pennsylvania courts have given very little guidance about what type of conduct satisfies the standard of fraud or fundamental unfairness, except to say that not receiving enough money for the cashed-out shares does not apply.
Share appraisals will continue to be the primary remedy available to disgruntled minority shareholders in a merger, but in exceptional cases of fraud, minority shareholders now have the right to take further action.
-- Alexis Unkovic McKinley
Meyer, Unkovic & Scott
Business Workshop is a weekly feature from local experts offering tidbits on matters affecting business. To contribute, contact Business Editor Brian Hyslop at firstname.lastname@example.org.