Opinion
Civil Action #5466 (1977).
Date Submitted: July 21, 1981.
October 6, 1981.
Aubrey B. Lank, Esquire, THEISEN, LANK, MULFORD GOLDBERG, P.A., Wilmington, DE.
Joseph A. Rosenthal, Esquire, MORRIS ROSENTHAL, P.A., Wilmington, DE.
ON PLAINTIFF'S MOTION TO COMPEL DISCOVERY: GRANTED IN PART
Gentlemen:
The plaintiff, Richard S. Kaye ("Kaye") seeks an order to compel the production of documents and things pursuant to Chancery Court Rule 37. The motion is granted in part and denied in part.
Pantone, Inc., a New York corporation ("Pantone-New York"), was merged into defendant Pantone, Inc., a Delaware corporation ("Pantone-Delaware"), on July 29, 1977. On the same date, Herbert Group, Inc. ("H.G.I."), a Delaware corporation, was also merged into Pantone-Delaware pursuant to 8 Del. C. § 228. Defendant Pantone-Delaware is the surviving corporation.
Kaye is a dissenting stockholder to the merger and is entitled to an appraisal of his shares of stock in Pantone-New York pursuant to 8 Del. C. § 228. He claims that the discovery he is seeking is relevant to the issue of value as part of the appraisal proceeding.
At the time of the merger, all shareholders of Pantone-New York received $1.00 per share. The selling price just before the merger was approximately $.75 per share and the net assets of Pantone-New York were approximately $.60 per share. During the fiscal year ending just prior to the merger, Pantone-New York had incurred substantial losses. At the time Kaye purchased his stock he paid not more than $.14 per share. Defendant claims there were no earnings at the time of the merger, and hence, no dividends were being paid.
Although defendant has produced some documents, Kaye argues that they constitute insufficient information with which to supply a basis for an accurate appraisal. Defendant, on the other hand, claims that Kaye's true motive is harassment and that the requested documents either have been produced, do not exist, or do not fall within the scope of discovery in an appraisal action. Defendant further alleges that documents have already been produced which exceed those to which Kaye is entitled and that to produce further documents would cost the defendant far more than the actual value of Kaye's 18,000 shares.
Kaye alleges that defendant is an acknowledged world leader in the field of color standardization with an extensive list of licensees and users. Since its formation in 1968, gross revenues have increased from $714,798.00 to $2,506,976.00 in 1979.
I
In refusing to comply with Kaye's discovery requests, defendant first argues that to comply with Kaye's requests would require a grievous and crippling interruption of the corporation's normal business activities. Defendant, however, failed to enumerate any specifics as to time required or amount of money involved. Defendant also argues that the burden is an unreasonable request in view of the size of Kaye's interest. There is no requirement, however, that a stockholder own a certain percentage of shares or have a large monetary interest in order to utilize his statutory right of appraisal. "Appraisal rights under this section shall be available only for the shares of any stockholder who has complied with subsection (b) of this section and has neither voted in favor of the merger nor consented thereto in writing pursuant to § 228 of this title." 8 Del. C. § 262(a). (emphasis added) Kaye is therefore entitled to any discovery which reasonably relates to the issue of the value of the Pantone shares.
II
Defendant also alleges that Kaye is not entitled to production of Pantone's internal revenue tax returns — citing cases which are distinguishable from the present case. Troglione v. McIntyre Aviation, Inc., 60 F.R.D. 511 (D. Pa. 1973); Payne v. Howard, D.D.C., 75 F.R.D. 465 (1977); Maldonado v. St. Croix Discount, Inc., D.V.I., 77 F.R.D. 501 (1978); and United States v. Hartigan, D. Minn., 402 F.Supp. 776 (1975). In response to defendant Pantone's allegation, Kaye cites Tri-Continental Corporation v. Battye, Del. Supr., 74 A.2d 71, 74 (1950) which held that a tax loss carryover was one of the intangible items of value an appraiser could properly consider — an item not appearing on corporate books. Taxes were also given consideration in In re Olivetti Underwood Corporation, Del. Ch., 246 A.2d 800, 807 (1968), even though a tax loss carry forward was not approved by the Court, due to lack of a foundation for the expert's conclusion and tax benefits were given consideration by the appraiser in Levin v. Midland-Roos Corporation, Del. Ch., 194 A.2d 50 (1963). It is therefore clear that tax returns are relevant to the issue of value of a going concern and must be produced in this action as to those years which are reasonably related to the time of the merger.
III
Defendant Pantone also objects to Kaye's request for the production of documents dating back to 1972 (five years before the merger) and forward until the production date. In In re Olivetti Underwood Corporation, Del. Ch., 246 A.2d 800 (1968), it is stated:
It is established law in Delware that income averaged over a reasonable period is to be considered in determining earnings for appraisal purposes. [cite] And average earnings over the five-year period immediately preceding the merger is ordinarily used as the basis for determining earnings value.
See also Sporberg v. City Specialty Stores, Del. ch., 123 A.2d 121 (1956); Application of Delaware Racing Ass'n., Del. Ch., 213 A.2d 203 (1965); Bell v. Kirby Lumber, Del. Ch., 395 A.2d 730 (1978); and Francis I. duPont Co. v. Universal City Studios, Inc., Del. Ch., 312 A.2d 344 (1973), aff'd,Universal City Studios, Inc. v. Francis I. duPont Co., Del. Supr., 334 A.2d 216 (1975). On the basis of the above citations, I find that it is not unusual to review the past 5-year financial records of a corporation in an appraisal action and records for that period must be produced.
IV
Defendant refers to In re Olivetti Underwood Corporation,supra, as standing for the proposition that post-merger developments should not be considered in an apprisal action. What the Court actually said in that case was that the principle of including a tax loss carry forward as a value factor in an appraisal proceeding had no application in that specific case because "[T]he issue comes down to what is fair and reasonable under the special circumstances of the case." Id. at 806. It is clear, however, that in an appraisal action the court should have at hand all relevant documents so that it can consider all indicia of value in deciding which standard of appraisal to use, even if the particular fact is ultimately not relied upon. While defendant is correct that the stock of Pantone-New York is to be valuedas of the date of the merger, subsequent value might well be the result of negotiations which took place prior to the merger. For example, in Bell v. Kirby Lumber Corporation, supra at 737, the appraiser "found a value for total sales over the ten year period and reduced it to present worth as of the date of the merger so as to ascribe a liquidation value to the stumpage . . .". In Bell the Court further states that "[I]n a § 262 proceeding, because of its purpose of placing a true, intrinsic value on shares of corporate stock, the appraiser should not be deprived by act of the parties of the opportunity to consider materials which he feels to be relevant." supra at 738-39.
I am unable to find any justification for defendant's argument that because it produced its financial statements and supplementary information for the years ended May 31, 1978 and 1977, plus notes indicating liabilities as of the date of the merger and a copy of a licensing agreement and related correspondence that it has provided "all the necessary and relevant evidence bearing upon the value of Pantone's shares as of the date of the merger." Defendant errs in its contention that financial projections for post-merger activities have no place in an appraisal hearing. Earning prospects are considered pertinent for evaluation purposes, and until the requested documents are produced, they are, or may be, representative of on-going activities, instituted prior to the date of the merger. For example, in In re Olivetti a long term distribution agreement was considered to be the major asset of the corporation for evaluation purposes. The production of records, however, must be limited to time periods reasonably related to the date of the merger. Three years after the merger should be an adequate time period.
8 Del. C. § 262 does not address itself to specific documents which should be produced or examined in an appraisal action. Each case turns on its own face, and information which is relevant for one appraisal might have no bearing on another.
But the requirement that consideration be given to all relevant factors entering into the determination of value dues not mean that any one fact is in every case important or that it must be given a definite weight in the evaluation. [cite] The relative importance of several tests of value depends on the circumstances. Sterling v. Mayflower Hotel, 93 A.2d 115, 116.
Moreover, the fact that Kaye has requested extensive discovery does not, per se, indicate bad faith. Sporborg v. City Specialty Stores, supra at 127. Pantone also claims that Kaye's request for, inter alia, documents and papers relating to all executed and proposed licenses, leases and contracts are highly confidential and involve trade secrets. I cannot agree. Kaye has not requested information on any secret formulas or methods. He needs to have access to all materials relevant in determining the market value of his shares. 8 Del. C. § 262 entitles him to this information. If there really is a problem of confidentiality, it can be resolved by the entry of a confidentiality order.
VI
The defendant objects to plaintiff's request for documents related to the merger of Pantone, Inc. and Herbert Group, Inc. on July 29, 1977. The argument is that under the appraisal statute it is improper to attempt to measure the synergistic value of the merger to the surviving corporation or its shareholders. Tanzer v. International General Industries, Inc., Del. Ch., 402 A.2d 382, at 394-95 (1979). The issue in Tanzer was the fairness of the merger not the appraisal value. A plaintiff in an appraisal action is entitled to documents which could be used to determine whether financial gains registered by Pantone subsequent to the merger date, but within a reasonable time of the merger, resulted from the merger or were solely attributable to favorable trends in the earnings of Pantone itself which may have been known or foreseen by Pantone's officers and directors prior to the merger, due to executory contracts, preliminary agreements and other factors. If the latter is found to exist, the data is relevant. Until the data is produced, such a determination cannot be made. The question as to what use the appraiser will make of the information is simply not before the Court.
VII
Although I have ruled that most of defendant's grounds for refusal to engage in discovery are invalid, nevertheless I am concerned about the overbroad language used by Kaye in his requests for discovery. This overbroad language leads to the conclusion that Kaye may not be acting in entire good faith in seeking his discovery. This is not a stockholder's derivative action; it is merely an appraisal action. It is therefore not the proper forum to address any alleged wrongdoings. The sole purpose of this action is to determine the value of the shares of Pantone as of the date of the merger. Universal City Studios, Inc. v. Francis I. DuPont Co., Del. Supr., 334 A.2d 216 (1975).
The overbroad demands of Kaye for discovery can be best illustrated by a review of plaintiff's first request for the production of.
"I, All books, records, accounting statements, schedules and worksheets, Internal Revenue filings, correspondence, communications, notes, memoranda, reports, valuation studies, appraisals, manufacturers' brochures, technical specifications, price lists, and other documents, papers and things relating to the asset value of Pantone stock as of the merger date (Notice, Item "23), including, without limitation, the following. . . ."
Obviously, worksheets have no relevance to the issue of value. Likewise, the demand for all correspondence, communications, notes, memoranda, manufacturers' brochures, technical specifications, price lists, and other documents, papers and things is overbroad.
Counsel are directed to confer and attempt to agree on what will be produced after reviewing this opinion. If they cannot agree, Kaye should rephrase his demand in compliance with this opinion.