## Facts

- Avaya, Inc., a Delaware corporation formed as a Lucent spin-off, had an unusually large base of small shareholders.
- Avaya estimated annual costs of several million dollars to maintain and mail required materials to small accounts.
- Avaya’s board proposed, and stockholders approved, a reverse/forward stock split to eliminate small holders and reduce administrative costs.
- The transaction used a reverse split (1-for-30, 1-for-40, or 1-for-50) that would reduce some holders below one full share; those holders would receive cash instead of any fractional share.
- A forward split in the opposite ratio would then restore the remaining holders to approximately their pre-transaction share counts.
- Cash-out consideration was based on market pricing methods, including a ten-day average trading price and/or sale of aggregated fractional interests in the market.
- Milton Applebaum, a minority stockholder owning 27 shares, would be cashed out under any proposed ratio.
- Applebaum sued to enjoin the transaction, alleging violations of 8 Del. C. § 155 and unequal treatment of stockholders.

## Issues

1. Whether a reverse/forward stock split that cashes out small holders violates 8 Del. C. § 155 by impermissibly or “selectively” disposing of fractional interests.
2. Whether the transaction’s market-based cash-out consideration satisfies § 155’s requirement of “fair value,” particularly where no fractional shares are issued.

## Decision

- The Delaware Supreme Court affirmed summary judgment for Avaya.
- The court held Applebaum’s § 155 theory relied on a mistaken premise because the transaction did not issue fractional shares; holders otherwise ending with fractions would receive cash.
- The court upheld the use of a reverse/forward split to reduce administrative costs by eliminating small accounts.
- The court held the cash-out pricing method satisfied the statutory “fair value” requirement, given Avaya’s actively traded public market.

## Legal Principles

- A corporation may implement a reverse/forward stock split to cash out small stockholders when properly authorized and supported by a rational corporate purpose, such as reducing administrative and recordkeeping costs.
- 8 Del. C. § 155 permits flexibility in addressing fractional interests, including paying cash in lieu of issuing fractional shares.
- Equal treatment in corporate transactions does not require identical outcomes for all stockholders when the transaction complies with the DGCL and applicable statutory standards.
- For actively traded shares, market-based pricing (including an average trading price over a defined period) can satisfy § 155’s “fair value” requirement for cashing out fractional interests.

## Conclusion

The court upheld Avaya’s reverse/forward split that eliminated small stockholders, reasoning that § 155 did not require issuing fractional shares and that a market-based cash-out formula for actively traded stock provided fair value.


Applebaum v. Avaya, Inc., 812 A.2d 880 (Del. 2002)