GM Sub Corporation (GM Sub), a subsidiary of Grand Metropolitan Limited, acquired all outstanding shares of Liggett Group, Inc., a Delaware corporation. Rothschild International Corporation (Rothschild) was the owner of 650 shares of the 7 percent cumulative preferred stock of Liggett Group, Inc. According to Liggett’s certificate of incorporation, the holders of the 7 percent preferred were to receive $100 per share ‘‘in the event of any liquidation of the assets of the Corporation.’’ GM Sub had offered $70 per share for the 7 percent preferred, $158.63 for another class of preferred stock, and $69 for each common stock share. Liggett’s board of directors approved the offer as fair and recommended acceptance by Liggett’s shareholders. As a result, 39.8 percent of the 7 percent preferred shares was sold to GM Sub. In addition, GM Sub acquired 75.9 percent of the other preferred stock and 87.4 percent of the common stock. The acquisition of the overwhelming majority of these classes of stock— coupled with the fact that the 7 percent preferred shareholders could not vote as a class on the merger proposal—gave GM Sub sufficient voting power to approve a follow-up merger. As a result, all remaining shareholders other than GM Sub were eliminated in return for payment of cash for their shares. These shareholders received the same consideration ($70 per share) offered in the tender offer. Rothschild brought suit against Liggett and Grand Metropolitan, charging each with a breach of its duty of fair dealing owed to the 7 percent preferred shareholders. Rothschild based both claims on the contention that the merger was a liquidation of Liggett insofar as the rights of the 7 percent preferred stockholders were concerned and that those preferred shareholders therefore were entitled to the liquidation preference of $100 per share, not $70 per share. Are the preferred shareholders entitled to a liquidation preference? Why?
