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Chancery Holds Stockholders Can Assert Disclosure Claims on Behalf of Other Stockholders but Must Do So Through a Derivative Action

New Enterprise Associates 14, L.P. vs. Rich, C.A. No. 2022-0406-JTL (Del. Ch. March 9, 2023)
Delaware law establishes that directors owe a duty of disclosure which arises as "the application in a specific context of the board's fiduciary duties…." In this case, stockholders asserted various claims against the board, including an allegation that the company's directors breached a duty of disclosure to other stockholders, which injured the plaintiffs when those stockholders were misled into approving a dilutive stock offering. This decision finds that the stockholder-plaintiffs can assert such a cause of action but that the resulting claim is derivative.

In advance of a sale of a privately-held corporation, directors sought and received the preferred stockholders' written consent for an additional stock offering to certain investors. Plaintiffs argued, and the Court agreed that when asking those stockholders to execute written consents, the directors had an obligation to disclose that the company received a preliminary expression of interest from a potential acquirer, which they failed to do. The Court held that this "novel" theory of liability where stockholders alleged disclosure violations to a separate subset of stockholders was viable under Delaware law, but it had to be alleged derivatively. The Court reasoned that under precedent concerning dilutive issuances, the only harm plaintiffs could suffer under such theory flows to them indirectly. The Court also addressed the plaintiffs' ability to challenge the merger directly based on the failure to obtain value for pre-merger derivative claims. Following Morris v. Spectra Energy P'rs (DE) GP, LP, 246 A.3d 121 (Del. 2021) and In re Primedia, Inc. S'holders Litig., 67 A.3d 455 (Del. Ch. 2013), the Court explained that to establish standing in such circumstances, the plaintiff must (1) plead an underlying derivative claim on which relief could be granted, (2) the value of the derivative claim must be material in the context of the merger, and (3) the allegations must support an inference that the acquirer would not assert the underlying derivative claim and did not provide value for it. The Court found all three elements to be present in this case.

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