Huff Fund Investment Partnership, et al. v. CKx, Inc.Annotate this Case
SAM GLASSCOCK III
COURT OF CHANCERY
STATE OF DELAWARE
COURT OF CHANCERY COURTHOUSE
34 THE CIRCLE
GEORGETOWN, DELAWARE 19947
Date Submitted: January 23, 2014
Date Decided: February 12, 2014
Samuel T. Hirzel
Dawn Kurtz Crompton
Procter Heyman LLP
300 Delaware Avenue, Suite 200
Wilmington, DE 19801
Stephen P. Lamb
Paul, Weiss, Rifkind, Wharton & Garrison LLP
500 Delaware Avenue, Suite 200
P.O. Box 32
Wilmington, DE 19899
Huff Fund Investment Partnership v. CKx, Inc.
Civil Action No. 6844-VCG
The Respondent asks me to order the Petitioner in this appraisal action to
accept a payment of what the Respondent considers the undisputed portion of the
value of its stock, in order to stop, in part, the running of interest at the legal rate.
For the reasons that follow, and despite the potential utility of such an approach, I
On November 1, 2013, I issued a Memorandum Opinion in this appraisal
action, in which I determined that, under the particular circumstances of this case,
the best indicator of fair value of the Petitioner’s shares was the merger price
generated by an arm’s length sales process.
However, in that Memorandum
Opinion, and in a supplemental bench decision on the Petitioner’s Motion for
Reargument dated January 13, 2014, I permitted the parties to supplement the
record with additional argument regarding whether the merger price included
synergies that should be excluded from going-concern value, and whether the
merger price failed to account for opportunities that should be included in goingconcern value.
In light of the ongoing proceedings, on November 27, 2013, the
Respondents filed a Motion to Stop the Accrual of Interest. The Respondent
requests that I order the Petitioner to accept an unconditional tender of $3.63 per
share, which represents its expert’s base case scenario for valuing CKx, plus
In other words, the Respondent agrees that under no
circumstances could CKx be valued at less than $3.63 per share, and it is willing to
tender that amount to stop the accrual of interest on that payment, which interest is
currently accruing at five and three-quarters percent, five percent above the Federal
Reserve discount rate. In effect, the Respondent seeks the equitable analog of an
offer-of-judgment rule, which allows Superior Court, but not Chancery, litigants
the ability to limit the adverse effects of a verdict.1 In addition to agreeing that the
Petitioner would not be required to return the tendered amount to the Respondent,
the Respondent has offered to indemnify the Petitioner for any negative tax
See Super. Ct. Civ. R. 68.
consequences incurred as a result of accepting a partial payment—an offer
conditioned on the Petitioner turning over certain tax decisions to the discretion of
the Respondent. Despite those concessions, the Petitioner continues to reject the
Respondent’s offer, and for the reasons explained below, I deny the Respondent’s
request for an order requiring the Petitioner to accept it.
The Delaware General Assembly has codified, in Section 262(h) of the
DGCL, the approach this Court must take in determining interest awards in
appraisal actions. Prior to its 2007 amendments, that Section provided in part:
After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any
element of value arising from the accomplishment or expectation of
the merger or consolidation, together with a fair rate of interest, if
any, to be paid upon the amount determined to be the fair value. . . .
In determining the fair rate of interest, the Court may consider all
relevant factors, including the rate of interest which the surviving or
resulting corporation would have had to pay to borrow money during
the pendency of the proceeding.2
Accordingly, prior to 2007, the Court of Chancery exercised a significant amount
of discretion to determine the interest to which a petitioner was entitled.
In 2007, the General Assembly revised its views on interest, and Section
262(h) now provides, in part:
Unless the Court in its discretion determines otherwise for good cause
shown, interest from the effective date of the merger through the date
8 Del. C. § 262(h) (2001) (emphasis added).
of payment of the judgment shall be compounded quarterly and shall
accrue at 5% over the Federal Reserve discount rate (including any
surcharge) as established from time to time during the period between
the effective date of the merger and the date of payment of the
The Section prescribes a formula from which this Court may deviate only for good
cause shown. The formula is the same legal rate that Delaware law implies when a
debt obligation does not specify a rate of interest.4
One circumstance in which this Court has understood the “good cause”
standard articulated in Section 262(h) to permit a departure from the statutory
interest rate is where there has been a demonstration of bad faith or vexatious
litigation.5 The limited discretion the Court retains to determine an alternative
award of interest upon such a finding does not otherwise alter the legislature’s
scheme for awarding interest in appraisal proceedings. While the Section does not
expressly prevent this Court from entering a partial judgment to enable the
Respondent to pay consideration, thereby stopping the accrual of interest on that
8 Del. C. § 262(h) (2013) (emphasis added).
See 6 Del. C. § 2301(a).
See In re Appraisal of Metromedia Int’l Grp., Inc., 971 A.2d 893, 907 (Del. Ch. 2009) (“The
question of interest on an appraisal judgment has been mercifully simplified. In 2007, the
Delaware General Assembly amended the appraisal statute to provide a simple default rule: a
party shall be awarded interest from the date of the merger through the date of payment of the
judgment compounded quarterly and accruing at 5.0% over the Federal Reserve Discount Rate as
measured during that period of time. This is the prescriptive statutory interest rate, unless good
cause is shown to depart from it. Adopting a different rate may be justified where it is necessary
to avoid an inequitable result, such as where there has been improper delay or a bad faith
assertion of valuation claims.”).
amount, I believe, for the reasons explained below, that such an order would be
incompatible with the General Assembly’s intent in revising Section 262(h).
In its Motion, the Respondent points out what it avers is an important
problem with the way interest awards now accrue under Section 262(h): namely,
that where market rates of return are low, the opportunity for what it describes as a
near risk-free return five percent above the Federal Discount rate may penalize a
respondent corporation, and may create perverse litigation and investment
incentives, including encouragement of litigation of cases without significant
potential for an award above the merger consideration, and even arbitrage of
appraisal claims. The Petitioner, for its part, argues that actual market returns on
equity are significantly higher than the legal interest rate, and because it is an
unsecured creditor of the now highly leveraged acquired company, “[t]he notion
that Petitioners are somehow benefiting from the accrual of prejudgment interest
is—in a word—preposterous.”6 Without considering the specific default risks and
costs of capital applicable here, I disagree that such a contention is of its nature
preposterous, and I note that, compared with fault-based litigation, the
opportunities for rent-seeking in appraisal actions are comparatively high;7
Pet.’s Br. in Opp’n to Resp’t’s Mot. to Stop the Accrual of Interest at 2.
I do not mean to imply that the Petitioner here is litigating in response to inappropriate
incentives or has maintained this action for any improper purpose.
therefore, factors that tend to create perverse litigation incentives in these actions
deserve close consideration by policy makers.
However, I need not address such concerns here, because in drafting Section
262(h), the General Assembly made a determination as to the proper balance of the
competing interests of appraisal petitioners, who have been cashed out of their
preferred investment and denied the ability to invest the merger consideration in
the market pending outcome of the case, and respondents, against whom too large
an interest award may operate as a penalty. The legislature chose to strike that
balance by providing that appraisal petitioners receive interest at the same “legal
rate” generally awarded under Delaware law.8 The appraisal petitioner receives
this rate to compensate for her temporary inability to invest in the market, through
the date of payment of “the judgment.” With respect to the appropriate interest
rate and accrual period in connection with statutory appraisal, the General
Assembly has made its call.
The Respondent argues that “[l]ongstanding Delaware and common law
principles hold that a valid tender of principal owed will terminate the running of
interest.”9 I am aware that equitable principles may support such a tolling of
interest, in certain situations. However, where the General Assembly has provided
a specific standard governing interest awards, such a statutory directive must trump
See 6 Del. C. § 2301(a).
Resp’t’s Br. in Support of Mot. to Stop the Accrual of Interest at 1.
those considerations. Here, the General Assembly has, in enacting Section 262(h),
determined that the appropriate way to compensate appraisal petitioners for their
lost investment opportunity, and to prevent the respondent corporation from being
unjustly enriched by the use of the petitioner’s capital, is not to compel petitioners
to accept prepayment, even if such prepayment is unconditional, but to award them
interest in the amount of five percent over the Federal Reserve discount rate
through the payment of a final judgment. That the legislature intended to limit
judicial discretion to deviate from this formula is made clear by comparing the preand post-2007 versions of the statute. The limited discretion remaining, to be
exercised upon a finding of good cause, permits me to deviate from the statutory
formula where a consideration of circumstances at the end of the process—of
which a wide variety might be relevant—indicates that an award at the statutory
rate would be unjust; but not to direct that respondents may avoid the running of
interest by prepayment as a matter of right, which is, ultimately, what the
Respondent suggests here. While I am sympathetic to the incentives driving this
Motion, ultimately I find the relief sought incompatible with the statute.
Finally, the Respondent contends, in the alternative, that good cause exists
under Section 262(h) for me to stop the accrual of interest, suggesting that the
Petitioner has “pursued overbroad document and third-party discovery, taken
irrelevant depositions and filed multiple unauthorized briefs, all of which have
delayed the proceedings.”10 Whether such misconduct has occurred in this case is
better evaluated at the conclusion of these proceedings.
For the foregoing reasons, I deny the Respondent’s Motion to Stop the
Accrual of Interest. IT IS SO ORDERED.
/s/ Sam Glasscock III
Sam Glasscock III
Id. at 3.