## Facts

- EMSI was a closely held Delaware corporation that serviced mortgage investments; Cavalier Oil Corporation controlled EMSI through majority ownership.
- William J. Harnett owned 1,250 shares of EMSI (about 1.5%).
- Cavalier consummated a short-form merger under 8 Del. C. § 253, cashing out minority stockholders and offering Harnett $93,950.
- Harnett rejected the offer and exercised appraisal rights under 8 Del. C. § 262; Cavalier filed an appraisal action in the Court of Chancery to determine fair value as of the merger date.
- Harnett argued that EMSI’s value should include the economic effect of a corporate-opportunity diversion by the controllers, and that higher cash-flow projections supported a larger valuation; he also asserted improper dilution from later share issuances.
- Cavalier argued the corporate-opportunity component was barred by res judicata due to earlier federal litigation and settlement, and sought a minority discount based on Harnett’s small, noncontrolling stake.
- The Court of Chancery valued EMSI as a going concern and fixed the fair value of Harnett’s shares at $347,000, rejecting a minority discount and declining to adopt certain projections or adjust for alleged dilution.

## Issues

1. Whether an appraisal valuation under 8 Del. C. § 262 may include the value impact of a corporate-opportunity diversion by controllers.
2. Whether res judicata barred consideration of the corporate-opportunity component because of prior litigation and settlement.
3. Whether “fair value” in a § 262 appraisal permits a minority discount for a small, noncontrolling, nonmarketable stake.
4. Whether the Court of Chancery erred in rejecting certain cash-flow projections and in refusing to adjust for alleged dilution.

## Decision

- The Delaware Supreme Court affirmed the appraisal judgment in full.
- The court held that considering the corporate-opportunity diversion as a component of EMSI’s going-concern value was permissible in an appraisal when used to measure intrinsic value rather than to litigate merger validity or obtain separate damages.
- The court held res judicata did not preclude the valuation use of those facts because the prior settlement preserved facts relevant to appraisal valuation.
- The court held a minority discount is improper in a § 262 appraisal of a going concern; shares are valued pro rata based on the value of the company as a whole.
- The court rejected Harnett’s cross-appeal, finding no reversible error in the trial court’s treatment of projections and its refusal to incorporate the asserted dilution claim on the record and scope presented.

## Legal Principles

- A § 262 appraisal compensates a dissenting stockholder for the proportionate interest taken in a going concern; the inquiry focuses on the corporation’s intrinsic value as of the merger date, excluding merger-generated value.
- Appraisal is not the forum to challenge merger validity or obtain derivative-type recoveries, but the court may consider controller misconduct facts to the extent they bear on the company’s earning capacity and going-concern value.
- Res judicata does not bar the use of previously litigated facts for appraisal valuation when a prior settlement or judgment preserves their use for determining fair value.
- “Fair value” in a Delaware appraisal is allocated pro rata and does not include a minority discount or marketability discount based solely on the stockholder’s lack of control.

## Conclusion

The Delaware Supreme Court affirmed a § 262 appraisal award that valued the company as a whole and allocated value pro rata without a minority discount, while allowing consideration of diverted corporate opportunities as a valuation factor when relevant and not precluded by a settlement preserving appraisal-related facts.


Cavalier Oil Corp. v. Harnett, 564 A.2d 1137 (Del. 1989)