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Delaware Court of Chancery Grants Motion to Dismiss Disclosure Claims Because Hedge Fund had Sufficient Information to Consider Corporation’s Self-Tender Offer

Chatham Asset Mgmt., LLC v. Papanier, C.A. No. 2017-0088-AGB (Del. Ch. Jan. 13, 2020).

The directors of a Delaware corporation that makes a self-tender offer must disclose all material facts. A fact is material if there is a substantial likelihood that a reasonable stockholder would consider it important in deciding whether to tender.

Twin River Worldwide Holdings, Inc. (“Twin River”) is a gaming industry holding company that planned a tender offer to purchase a portion of its outstanding stock. Due to regulatory limits imposed by the Rhode Island Department of Business Regulation (“DBR”), no single stockholder could own more than 15% of the corporation’s stock. However, one stockholder, Standard General, had confirmed with DBR that it would not be in violation if it did not tender its shares and, as a result of other stockholders tendering their shares, DBR ended up owning more than 15 percent of Twin River’s outstanding stock after the transaction. The Offer to Purchase for the tender set forth Standard General’s pre-tender ownership percentage and stated that it did not intend to participate in the tender. 

Chatham Asset Management, a hedge fund investor in Twin River, brought a claim for breach of fiduciary duty for failing to disclose the regulatory variance granted to Standard General. Chatham claimed the failure to disclose the approval was an omission of material fact because, had Chatham known that such regulatory variances were possible, it would have sought its own variance and not tendered it shares. Chatham claimed it thought it had to tender, because other stockholders’ tendering might cause it to exceed the 15% ownership limit. The Delaware Court of Chancery dismissed this claim, reasoning that it “defies reason” that a “sophisticated hedge fund” was unaware that it could try to seek regulatory approval to avoid participating in the tender offer. The Court also explained that Delaware law considers what is material to a hypothetical reasonable stockholder, rather than what may be important to any particular idiosyncratic investor.

The Court also rejected a claim for failure to disclose roughly $3.6 million in allegedly improper payments made to members of management before the transaction. The Court reasoned that such payments (amounting to less than .5% of Twin River’s market capitalization) were not material to the “overall value of the corporation,” which would be the “key consideration” in deciding whether to tender.

The Court accordingly held that a reasonable stockholder would not need any further information to decide whether to participate beyond what was set forth in the Offer to Purchase. Otherwise, the Court denied the defendants’ motions to dismiss certain direct claims against the director and officer defendants for alleged self-dealing, and the case will go forward to discovery.

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