Alycia M. Vivona

Under Section 253 of the Delaware General Corporation Law (DGCL) and Section 18-209(i) of the Delaware Limited Liability Company Act (DLLCA), a parent company owning at least 90% of the outstanding shares of a Delaware corporation has the right to merge with that subsidiary without approval of the board of directors or stockholders of the subsidiary. This mechanism — used to eliminate the shareholdings of the subsidiary’s minority stockholders without their consent, or even over their objections — is referred to by various names, including short-form merger, parent-subsidiary merger, cash-out merger, freeze-out merger, squeeze-out merger, and (in the M&A context) triangular merger.

While minority stockholders cannot prevent a short-form merger, they can challenge the consideration paid for their shares in the merger by demanding an appraisal under Section 262 of the DGCL. In the recent case of Abraham v. Estate of Wirtz, 2025 WL 3625719, the Delaware Court of Chancery resolved a motion to dismiss with respect to an exercise of appraisal rights in a short-form merger — and reinforced a key lesson for counsel of both controlling and minority stockholders.

Delaware Court of Chancery Weighs In

In Abraham, Wirtz Corp. owned, directly and indirectly, 97% of the outstanding shares of American Mart Corp., a Delaware corporation. Wirtz caused American Mart to merge with its newly formed subsidiary American Mart Co. LLC (AMLLC) under Section 18-209(i) of the DLLCA, with the retail investors who owned the remaining 3% of American Mart receiving merger consideration equal to $357 per share. One of those retail investors, David Abraham, claimed that the merger consideration undervalued his shares of American Mart by up to 19 times and demanded an appraisal under Section 262 of the DGCL. AMLLC rejected Abraham’s appraisal demand on the grounds that it failed to comply with Section 262, and Abraham sued.

Requirements Under Section 262

The court agreed with AMLLC that Abraham had not properly exercised his appraisal rights, noting that:

• Appraisal is a minority stockholder’s sole recourse in a short-form merger absent fraud or illegality.

• Exercise of appraisal rights requires strict compliance with Section 262 of the DGCL. A good-faith effort to comply is not sufficient.
• A controlling stockholder does not have to establish the entire fairness of a short-form merger; the controlling stockholder must only satisfy its duty of disclosure.
• To satisfy its duty of disclosure under Section 262, a controlling stockholder must provide minority stockholders with a notice of appraisal rights that includes (1) a correct copy of the appraisal statute and (2) sufficient information for the minority stockholder to determine whether seeking appraisal is worthwhile. The controlling stockholder’s notice need not repeat the procedures that are outlined in the statute.
• Abraham’s appraisal demand failed to satisfy the requirements of Section 262 in part because it did not identify the record owner of the shares beneficially owned by Abraham. The court would not excuse this failure even though all American Mart shares not owned by Wirtz were held in street name by Cede & Co., so AMLLC knew the identity of the record owner.
• A “quasi-appraisal” remedy is only available when the controlling stockholder breaches its duty of disclosure, not when a minority stockholder’s demand for appraisal fails to comply with Section 262.

Once AMLLC satisfied its duty of disclosure, the remedy of quasi-appraisal was no longer available, and the burden fell on Abraham to exercise his appraisal rights in accordance with Section 262. Because Abraham failed to strictly satisfy the statutory requirements, he was not entitled to an appraisal.

A Final Surprise

But, after shooting down all of Abraham’s arguments under Section 262, the court had a final surprise: The merger may not have been valid after all, since AMLLC may not have in fact owned the shares of American Mart at the time of the merger.

Based on statements in the notice of appraisal rights, Abraham argued that affiliates of Wirtz other than AMLLC owned 90% of the shares of American Mart at the time of the merger and that, as a result, AMLLC could not have validly completed the merger under Section 18-209(i) of the DLLCA. Rather than simply respond that AMLLC did, in fact, own the American Mart shares, AMLLC argued that it had the right to complete the short-form merger as an affiliate of the 90% owner, Wirtz. The court rejected this “confounding” argument — stating that the short-form merger statute does not support that interpretation — and held that Abraham stated a claim for violation of Section 18-209(i) while limiting Abraham’s relief to targeted discovery into AMLLC’s share ownership at the time of the merger.

The Upshot: Counsel Must Check, and Double-Check, All Statutory Requirements

Abraham had no appraisal remedy for the purported undervaluing of his American Mart shares because he failed to include certain straightforward statements in his appraisal demand. And notwithstanding the careful preparation and distribution of an eight-page, single-spaced notice of appraisal rights, Wirtz may see the short-form merger invalidated if it failed to ensure that the shares of American Mart were in fact transferred to the newly formed AMLLC before consummation of the merger.

These undesirable results — not to mention the costs of litigation — could have been avoided by strict compliance with the applicable statutes. Thus, this case serves as a reminder of counsel’s responsibility to carefully review, and ensure compliance with, all statutory requirements when advising clients on short-form mergers.