Financial Articulation of a Fiduciary Duty to Bondholders with ...

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CREIGHTON LAW REVIEW market price of "a fraction under $14 per share" before the $21 per share first-step acquisition 8 7 and its stock market price of $14.50 per share before the $21 per share cash-out merger 8 8 is consistent with the view that the capital market perceived the parent as not intending to completely acquire the subsidiary's stocks because otherwise the share price before the $21 per share cash-out merger arguably would have been around $21 instead of $14.50. This apparent capital market perception is consistent with the fact that the parent did not contemplate merging with the subsidiary until almost three years after their stock purchase bargaining in the first-step acquisition. 89 Thus, Weinberger represents the generalized fact pattern of a surprise nonsynergistic parent-subsidiary cash-out merger occurring in an efficient capital market. 90 2. Dicta Aspects of Weinberger [Vol. 20 Weinberger involves a class action in equity, on behalf of merger-objecting subsidiary stockholders who were eliminated as stockholders by operation of the merger statute, 91 challenging the fairness of the parent-subsidiary cash-out merger. 92 Although Weinberger's holding is irrelevant to the bondholder-stockholder focus of this Article, 93 aspects of Weinberger's views are relevant. 94 Weinberger states that "a more liberal approach [to securities valuation] must include proof of value by any techniques or methods which are generally considered acceptable in the financial community and otherwise admissible in court.1 95 Weinberger thereby opens the door to issues, detected by the Black-Scholes option-pricing framework, concerning unanticipated wealth expropriations among classes of corporate securities. 96 Weinberger: (1) affirms a fiduciary duty of loyalty (with "good management") on corporate officers and directors to the corporation, 97 (2) affirms a fiduciary duty of loyalty (with "complete candor") on corporate officers and directors to the 87. Weinberger, 457 A.2d at 704. 88. Id. at 706. 89. Id. at 704-05. 90. See supra text accompanying notes 75-89. 91. DEL. CODE ANN. tit. 8, § 251 (1974). 92. Weinberger, 457 A.2d at 703. 93. For a statement of the narrow definition to be given to court determinations, see H. BLACK, HANDBOOK ON THE LAW OF JUDICIAL PRECEDENTS 37 (1912) and K. LLEWELLYN, THE BRAMBLE BUSH 42 (1960). 94. For a statement of the persuasive authority of dicta, see K. LLEWELLYN, supra note 93, at 42. 95. Weinberger, 457 A.2d at 713. 96. A. Barkey, supra note 1, at 6, 10. 97. Weinberger, 457 A.2d at 710.
1986] FIDUCIARY DUTY TO BONDHOLDERS corporation's stockholders, 9 8 (3) states that statutory appraisal "shall govern the financial remedy available to minority shareholders in a cash-out merger," 99 (4) finds that "there is a legislative intent to fully compensate shareholders for whatever their loss may be, subject only to the narrow limitation that one can not take speculative effects of 1 00 ° the merger into account, (5) states that "elements of future value, including the nature of the enterprise, which are known or susceptible of proof as of the date of the merger and not the product of speculation, may be considered" in the statutory appraisal, 1 01 (6) states that in the statutory appraisal proceedings, "[w]hen the trial court deems it appropriate, fair value also includes any damages, resulting 0 2 from the taking, which the stockholders sustain as a class,"' (7) states that if the statutory appraisal remedy is inadequate, then the courts may "fashion any form of equitable and monetary relief as '10 3 may be appropriate, including rescissory damages. 3. The Bondholder-Weinberger Hypothetical: Facts "Nonsubordinated bonds" are bonds having a corporate payment priority equal to that of other bonds while contractually established payment priorities operate among the corporation's bonds.' 0 4 The covariance between two returns equals the product of the positive square root of each return's variance times the "correlation coefficient."' 0 5 The correlation coefficient can vary from +1 to 1: +1 means perfect correlation, 0 means no correlation, and -1 means 10 6 perfect inverse correlation. Imagine two for-profit Delaware corporations--each having one 98. Id. (quoting Lynch v. Vickers Energy Corp., 383 A.2d 278, 281 (Del. 1977) (quoting Lynch v. Vickers Energy Corp., 351 A.2d 570, 573 (Del. Ch. 1976))). 99. Id. at 715 (construing DEL. CODE ANN. tit. 8, § 262(h) (1974)). See generally Seligman, Reappraising the Appraisal Remedy, 52 GEo. WASH. L. REV. 829, 831-37 (1984); Thompson, Squeeze-Out Mergers and the "New" Appraisal Remedy, 62 WASH. U.L.Q. 415, 416-23 (1984). 100. Weinberger, 457 A.2d at 714. 101. Id. at 713. 102. Id. "Weinberger does not say when it would be appropriate to include this private eminent domain element of damages in the value determination.... Other than rescissory damages, it is difficult to imagine any damages that the court could have been contemplating." Berger & Allingham II, A New Light on Cash-Out Mergers: Weinberger Eclipses Singer, 39 Bus. LAW. 1, 18-19 (1983). 103. Weinberger, 457 A.2d at 714 (stating that courts may fashion such a remedy "particularly where fraud, misrepresentation, self-dealing, deliberate waste of corporate assets, or gross and palpable overreaching are involved"). 104. See generally Everett, Subordinated Debt - Nature, Objectives and Enforcement, 44 B.U.L. REV. 487, 489-96 (1964). For a theoretical discussion of debt subordination agreements, see Carlson, A Theory of Contractual Debt Subordination and Lien Priority, 38 VAND. L. REV. 975, 982-83 (1985). 105. M. SPIEGEL, supra note 41, at 82. 106. Id.
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