## Facts

- The Signal Companies, Inc. acquired 50.5% of UOP, Inc.’s shares and placed six or seven directors on UOP’s 13-member board.
- Signal later sought to acquire the remaining UOP shares through a cash-out merger.
- Two directors serving on both Signal’s and UOP’s boards prepared an internal analysis for Signal, using nonpublic UOP information, concluding Signal could pay up to $24 per share and still obtain a favorable investment return.
- Signal proposed, and UOP ultimately accepted, a $21-per-share cash-out merger price.
- UOP’s CEO supported the price as “generous” if employee benefits were satisfactory and did not press for a higher price.
- UOP retained Lehman Brothers to provide a fairness opinion on short notice; Lehman concluded $21 was fair after a limited review and had also performed work for Signal.
- The internal study was not disclosed to UOP’s outside directors or to minority shareholders.
- UOP’s board unanimously recommended the merger, and a majority of minority shareholders approved; the merger closed in May 1978, eliminating the minority.
- A minority shareholder filed a class action alleging breaches of fiduciary duty by the controller and directors, including material nondisclosure, conflicts, and unfair process and price.

## Issues

1. Whether a controlling shareholder freeze-out merger is reviewed for “entire fairness” without requiring the plaintiff to plead specific fraud or misconduct.
2. Whether a majority-of-the-minority stockholder vote shifts the burden of proving fairness in a controller cash-out merger.
3. Whether nondisclosure of material information and reliance on a potentially conflicted, limited fairness opinion defeated fair dealing and an informed stockholder vote.
4. How “fair price” and the appraisal remedy should be determined, including what valuation methods and value elements may be considered.
5. Whether a separate “business purpose” requirement for freeze-out mergers should apply.

## Decision

- The Delaware Supreme Court, sitting en banc, reversed the Court of Chancery and remanded for a fair-value determination.
- The court held that a controller cash-out merger is subject to “entire fairness” review, encompassing fair dealing and fair price, with the burden on defendants when the controller stands on both sides.
- The court ruled the minority vote did not shift the burden because the vote was not fully informed due to material nondisclosure.
- The court found the process failed the duty of candor and fair dealing, citing the undisclosed internal valuation analysis and deficiencies in the fairness-opinion process.
- The court broadened appraisal valuation to allow consideration of all relevant value factors and generally accepted financial methods, including non-speculative elements of future value known or susceptible of proof as of the merger date.
- The court rejected the separate Singer “business purpose” test as unnecessary given entire fairness review and the expanded appraisal remedy.

## Legal Principles

- In a freeze-out merger where a controlling stockholder stands on both sides, defendants must prove “entire fairness,” analyzed as a unified inquiry comprising fair dealing and fair price.
- Fair dealing examines timing, initiation, structure, negotiation, disclosure, and how director and stockholder approvals were obtained.
- Fair price addresses economic and financial considerations and must consider all relevant factors bearing on intrinsic value, including assets, market value, earnings, and future prospects.
- Directors and controlling stockholders owe a duty of candor requiring disclosure of all information in their possession that is material to stockholders’ decision-making.
- A majority-of-the-minority vote may affect the burden of proof only if fully informed and uncoerced; it does not change the entire fairness standard.
- Appraisal may use any generally accepted financial techniques and consider non-speculative, merger-date-known (or provable) elements of value; valuation is not confined to rigid or formulaic approaches.
- A separate “business purpose” requirement is not a prerequisite to effecting a long-form controller freeze-out merger under Delaware law.

## Conclusion

The court required controlling stockholders and conflicted directors to justify freeze-out mergers under the entire fairness standard, treated nondisclosure of material valuation information as fatal to an informed minority vote, expanded appraisal to incorporate modern valuation methods and relevant value elements, and eliminated the Singer business-purpose test as an independent constraint.


Weinberger v. UOP, Inc., 457 A.2d 701 (Del. 1983)