Opinion
Civil Action #6146 (1980).
Submitted: April 29, 1983.
May 23, 1983
Aubrey B. Lank, Esquire, Steven D. Goldberg, Esquire, THEISEN, LANK, MULFORD GOLDBERG, P.A. Wilmington, DE.
Joseph A. Rosenthal, Esquire MORRIS AND ROSENTHAL, P.A. Wilmington, DE.
ON PLAINTIFFS' MOTION TO COMPEL DISCOVERY: GRANTED IN PART
Gentlemen:
Plaintiffs moved for an order to compel the production of documents pursuant to Chancery Court Rule 37. The motion to compel production is granted in part and denied in part.
I
On December 21, 1979 Provincial House, Inc. ("Provincial"), a Delaware corporation, was merged into defendant Proco Management, Inc. ("Proco"), a Michigan corporation. Provincial was engaged in the delivery of health care services in the State of Michigan. It appears that Provincial, as one of the largest health care service operations in Michigan, owned or operated basic nursing homes, nursing homes for the mentally retarded and rehabilitation facilities for the mentally retarded.
Under the terms of the merger agreement, each share of Provincial common stock, excluding certain shares of stock owned by Edward F. Solomon Trust No. 1 and the Provincial Employee Stock Bonus Plan, was entitled to receive $3.75 per share from Proco. Plaintiffs, the dissenting stockholders to the Provincial-Proco merger, instituted an appraisal action pursuant to 8 Del. C. § 262 on April 15, 1980.
On November 4, 1981, almost two years after the merger was effectuated and after this appraisal action was instituted, defendant Proco entered into a contract under which Beverly Enterprises, Inc. ("Beverly") agreed to buy certain health care facilities for the sum of $53,820,000 which had been valued at approximately $17,000,000 at the time of the merger. Due to further negotiations and changes within the Michigan reimbursement system, the sale did not take effect until October 1, 1982, approximately 3 years after the Provincial-Proco merger. In addition to and independent of the sale to Beverly, Proco sold its child-care facilities to Gerber Enterprises ("Gerber") in January 1982.
To date, substantial discovery has taken place, including document production and oral depositions. In fact, defendant Proco has produced several documents relating to Provincial's value at the time of the merger including production of certain post-merger documents. Notwithstanding this production, plaintiffs now by this motion, seek further discovery which they say is relevant and necessary to the determination of value of Provincial at the time of the merger.
II
The plaintiffs have made the following requests: copies of all appraisals made by or on behalf of defendant or made by or one behalf of third parties with respect to the value of defendant's facilities, fixtures and personal property between June 30, 1975 and June 1, 1982; Medicare and Medicaid cost reports for periods ending June 30, 1979, June 30, 1980, June 30, 1981 and June 30, 1982; copies of all contracts, agreements and closing documents relative to the purchase of any capital assets between December 15, 1979 and June 1, 1982; copies of all agreements relative to any completed sale or proposed sale of any assets sold by the defendant between December 15, 1979 and June 1, 1982; copies of tax returns for fiscal years of 1980, 1981 and 1982; copies of all balance sheets and profit and loss statements prepared internally or externally for 1980, 1981 and 1982; all accountant's work papers internally or externally relative to gain or loss on the sale of assets contracted to between December 15, 1979 and June 1, 1982; the contract between defendant and Beverly, dated November 4, 1981 and all documents referred to therein; a copy of the balance sheet as it existed on the date of settlement; and a listing of all property, real and personal, not sold to Beverly as a result of the November 4, 1981 agreement or not sold prior to June 1, 1982.
Defendant has already produced: appraisals up to the time of the merger; the 1979 and 1980 Medicare and Medicaid cost reports; tax returns for 1980 and 1981; balance sheets and profit and loss statements through June 30, 1981; and the contract entered into on November 4, 1981 between defendant and Beverly. As to the other requests, defendant, in effect, objects on the ground of irrelevancy.
III
Much of the parties' respective arguments are based upon two unreported Chancery decisions, Kahn v. Household Acquisition Corporation, Del. Ch., C.A. No. 6293-N.C., Brown, Ch. (April 26, 1983), and Kaye v. Pantone, Del. Ch., C.A. No. 5466-N.C., Hartnett, V.C. (Oct. 6, 1981), which, of course, are not stare decis. Plaintiffs argue that Kaye v. Pantone defines the scope of discovery in appraisal proceedings to include all relevant post-merger activities of the surviving corporation. Defendant necessarily argues that Kahn v. Household Acquisition Corporation limits the scope of discovery in appraisal proceedings to relevant post-merger activities within one year from the date of the merger.
Neither Kaye nor Kahn, however, sets forth a hard and fast rule. Both parties seem to ignore the fact that the issue always comes down to "what is fair and reasonable under the special circumstances of the case." See In re Olivetti Underwood Corporation, Del. Ch., 246 A.2d 800, 806 (1968). In Kahn Chancellor Brown permitted discovery to occurrences slightly more than one year following the merger date based on the fact that almost one year later defendant entered an agreement to sell all its stock for more than twice the selling price at the time of the merger. In Kaye the scope of discovery was permitted as to post-merger information reasonably calculated to reveal matters that were ongoing prior to or at the time of the merger. The focus of both these decisions was the post-merger transaction, event or information as it related to the date of the merger.
While it is significant that 8 Del. C. § 262 now mandates the determination of fair value based upon relevant factors including elements of future value, the prescribed formula is not without limitation. In other words, only those elements which are known or susceptible of proof as of the date of the merger and not the product of speculation may be considered. Weinberger v. UOP, Inc., Del. Supr., 457
A.2d 701 (1983).
The fact that plaintiffs' motion addresses discovery matters rather than the determination of value or the admissibility of evidence at trial is also important. At this stage of the proceeding, discovery of post-merger events may lead to the discovery of relevant information which existed prior to or at the time of the merger between Provincial and Proco. Conversely, it may well be that no such post-merger discovery will have any bearing on the fairness of the merger price and will consequently not be admissible at trial.
Therefore, at this stage, the proper criterion as to the scope of the discovery is whether the discovery sought is reasonably calculated to lead to admissible evidence as to the value as of the date of the merger. The contract entered into within two years of the merger by which defendant contracted to sell certain assets for $54,000,000 which were valued at the time of the merger at $17,000,000 might well lead to admissible evidence with regard to the true value of the shares at the time of the merger. The production of documents, however, must be limited to the time period reasonably related to the date of the merger. Discovery, therefore, shall be permitted as to the period from the merger to November 4, 1981, the date of the contract between the defendant and Beverly, of the following: copies of all appraisals made by, or on behalf of, defendant up to the time of the contract — November 4, 1981; copies of all contracts, agreements and closing documents with reference to completed or proposed sales through June 1, 1982; copies of the income tax returns for fiscal years ending June 1980, June 1981 and June 1982; copies of balance sheets and profit and loss statements for fiscal years through June 30, 1982; all documents comprising the series of exhibits referred to in the Contract of Sale.
I find that copies of contracts relative to defendant's purchases, appraisals made by or on behalf of third parties, accountant's work papers internally or externally, the balance sheet as of the date of the settlement with Beverly and the list of all property not sold between November 4, 1981 and June 1, 1982 are not likely to lead to admissible evidence as to value and, therefore, are not discoverable. Additionally, I find it unnecessary for defendant to produce any further Medicare or Medicaid cost reports because such expenditures should be readily ascertainable from the balance sheets.
An appropriate order may be submitted.