Expedition Doesn't Extend to Non-Colorable Claims
The Delaware Court of Chancery has long expressed its preference that the time to bring a disclosure claim regarding a proposed merger is before the stockholders vote and the deal closes. Such prompt pleading enables the court to fix any potential harm before the merger occurs. In part for that reason, the court follows the practice of "'erring on the side of more [expedited hearings] rather than fewer,'" as it wrote in Ehlen v. Conceptus, C. A. No. 8560, slip op. at 3 (Del. Ch. May 24, 2013). While the standard to obtain expedition is minimal — the plaintiff must demonstrate a colorable claim and a sufficient possibility of irreparable harm — a plaintiff fails to meet it with rote pleading or conduct inconsistent with a demand for expedition. As Ehlen illustrates, the court will require a greater showing of colorability if a plaintiff unduly delays in seeking expedition, even if the delay itself does not constitute laches, and deny as colorable disclosure claims if the plaintiff cannot demonstrate that allegedly omitted information would alter the total mix of information available to the stockholders.
Ehlen involved a merger transaction that the board of the selling company announced April 29. The transaction will occur in two steps, with the first closing today. The plaintiff filed its complaint May 15. The court rejected the defendant's argument that the delay in filing of the complaint justifies denying expedition on the ground of laches, finding no fault with the plaintiff's decision "to await a final proxy and file a complaint with strong claims." The court was troubled, however, that the plaintiff waited an additional week to file the motion to expedite May 21, which the court scheduled for oral argument May 23. "With only three weeks between complaint and closing, a week's delay is significant," the court wrote in the opinion. Thus, while the court did not deny the motion to expedite based on this delay, it held that the plaintiff bore an extra burden to justify the substantial costs of expedition through the strength of the plaintiff's claims of wrongdoing.
The plaintiff's failure to stand by most of the allegations of the complaint at oral argument eight days after it filed the complaint contributed to the court's lack of confidence in the plaintiff's assertions of wrongdoing. The plaintiff had complained that the defendant board breached its Revlon duties, violated in six respects the duties of care and loyalty in agreeing to certain deal protections and omitted 14 material facts in its disclosures, according to the opinion. By the time of the hearing, the plaintiff rested solely on three disclosure claims. The lesson here is that a plaintiff should think hard about whether its allegations truly merit expedited treatment. The combination of delay in filing the motion for expedition and abandonment of most of its claims of wrongdoing as colorable negatively affects a plaintiff's prospects for success.
The court nonetheless examined each disclosure claim. The court found wanting the plaintiff's claim that because the seller had a product in a clinical trial in Europe, it was required to develop management forecasts that extended more than five years. The seller disclosed the results of its banker's discounted cash-flow analysis using the five-year projections, which the court noted are routine in fairness opinions. With no particularized allegations as to why a longer time period would be superior — particularly when the further out projections go, the more speculative they are — and with the seller having disclosed the existence of the European trial, the court found additional disclosure regarding the DCF analysis would not alter the total mix of information. The court rejected the remaining disclosure allegations as inconsistent with the facts or as requiring a level of detail — an effective play-by-play of the reasons the board rejected the other bidders — that Delaware law does not require.
The main lesson for practitioners is that context matters. If a plaintiff files its complaint four weeks before a transaction is to close and then waits one week to move for expedition, that delay is significant and may require the plaintiff to have stronger claims. If, during oral argument, the plaintiff abandons 85 percent of the claims it filed only one week earlier and without any intervening discovery, the court will lack confidence that expedition is required. Finally, the court will examine each disclosure claim and deny expedition if, under well-settled principles, the disclosure claims lack merit. The Ehlen case demonstrates that the colorability standard, while low, is real and that if a plaintiff cannot plead facts sufficient to meet it, the Chancery Court will spare a corporation, its stockholders and the taxpayers the costs of expedition.