Which Shell Is the Dividend (Pea) Under?
In August 2022, we digested and entered into the BVLaw case platform a stockholder litigation case, In re GGP,1 wherein the Supreme Court of Delaware determined that the Delaware Chancery Court erred in dismissing claims regarding appraisal rights disclosures in a merger.
Brookfield Property Partners Inc. acquired GGP Inc. in a merger transaction. The merger was structured so that Brookfield paid a sizable preclosing dividend followed by a small residual payment called a “per share merger consideration.” GGP stockholders were told they could exercise their appraisal rights solely in connection with the merger, set at $23.50 per share, in relation to the per-share merger consideration, valued at $0.312 per share. The plaintiff stockholders claimed they were led to believe that a fair value determination would be limited to the value of the post-dividend of GGP. The Supreme Court agreed with the Chancery Court that the defendants did not unlawfully eliminate appraisal rights but disagreed that the proxy disclosures were sufficient. The Supreme Court concluded the Chancery Court erred in dismissing the plaintiffs' disclosure claim against the GGP directors and the stockholders’ aiding and abetting claim against Brookfield.
Apparently others have taken notice of the premerger dividend approach. An ongoing merger proposal between Kroger and Albertsons might feature a similar premerger dividend. The New York Times reported in an article in December 2022 that Albertsons is planning a premerger dividend to its shareholders of $4 billion.2 Cerebus’ 30% stake was the largest Albertsons shareholder, but, along with their “Buy-Out Group” members, 73% of Albertsons is controlled. This group would receive about $3 billion of the dividend. The dividend would be funded with $2.5 billion of accumulated cash and borrowing of $1.5 billion. Several states attorneys general have sued to have the dividend stopped, arguing it would strip Albertsons of its ability to compete. In January of this year, the Washington Supreme Court paved the way for the dividend to proceed.3
Not only would the dividend provide a windfall to the Buy-Out Group, but also it would likely, as in the GGP case, lessen the opportunity for challenges to the merger price by other shareholders of Albertsons, a public company. The GGP case shows that this maneuver can be legal as long as you follow all of the other rules, including proper disclosure in the merger documents.
1 In re GGP, Inc. Stockholder Litig., 2022 Del. LEXIS 211; 2022 WL 2815820 (July 19, 2022).
2 Joe Nocera, "The Kroger-Albertsons Merger Spotlights a Popular Private Equity Tactic," nytimes.com/2022/12/17/business/dealbook.
3 Cerebus bought Albertsons for $350 million in 2006.