## Facts

- Royal Dutch Petroleum, through subsidiaries, controlled about 70% of Shell Oil Company’s common stock and sought to cash out the minority.
- After an initial $55-per-share proposal was rejected by Shell’s board, the controller pursued a tender offer at $58 per share, increasing its ownership to 94.6%.
- The controller completed a short-form cash-out merger under Del. Gen. Corp. L. § 253, paying $58 per share to remaining minority holders.
- The merger offered an additional $2 per share to stockholders who waived appraisal rights by a stated deadline.
- In connection with the cash-out, the controller disseminated an information package containing a discounted cash flow (DCF) table for proved oil and gas reserves.
- Due to a computer programming error, the DCF table omitted cash flows from about 295 million barrel equivalents of U.S. proved reserves.
- The omission understated projected cash flows by roughly $1.1 billion (about $3–$3.45 per share) and conveyed an inaccurate negative trend in reserves and cash flows from 1984 to 1985.
- Minority stockholders brought a class action alleging breach of the fiduciary duty of candor based on materially misleading disclosure; the Court of Chancery found liability and awarded damages, and the controller appealed.

## Issues

1. Whether the DCF table’s reserve and cash-flow misstatements were material to a reasonable minority stockholder deciding whether to accept the merger consideration and waive appraisal rights.
2. Whether the controlling stockholder that initiated and executed the short-form merger could be held responsible for material misstatements in the disclosure materials, even if the mistake originated as an internal programming error.

## Decision

- The Delaware Supreme Court affirmed the Court of Chancery’s judgment for the minority stockholder class.
- The Court held the DCF table was materially misleading because the omitted reserves and cash flows would likely have altered the total mix of information for a reasonable stockholder.
- The Court rejected arguments that the omission was immaterial because it represented a small percentage of total reserves or fell within an acceptable valuation “error band.”
- The Court held the controlling stockholder was responsible for ensuring complete and accurate disclosures used in the cash-out and could not avoid liability by attributing the misstatement to subordinate personnel or inadvertent error.
- The damages award based on the disclosure violation was left undisturbed.

## Legal Principles

- A controlling stockholder effecting a freeze-out transaction owes minority stockholders a fiduciary duty of candor and must disclose fully and fairly all material facts relevant to the stockholder’s choice to accept consideration or seek appraisal.
- Information is material if there is a substantial likelihood that a reasonable stockholder would view it as having actual significance in deliberations, including how it changes the “total mix” of available information.
- Materiality is context-specific and may depend on qualitative effects (such as the way information influences perceived trends and future prospects), not merely quantitative measures.
- A controller that structures and disseminates the materials for a cash-out transaction bears responsibility for their accuracy; lack of intent or internal error does not excuse materially misleading disclosure.

## Conclusion

The court held that a controller cashing out minority stockholders must ensure disclosure materials are accurate and not materially misleading; a large, trend-altering DCF omission was material, and the controller remained liable despite the error’s accidental origin.


Shell Petroleum, Inc. v. Smith, 606 A.2d 112 (Del. 1992)