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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
Morris James Blogs
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Corwin holds that approval of a transaction by a fully-informed, uncoerced majority of the disinterested stockholders invokes the deferential business judgment standard of review for a post-closing damages action, making the transaction almost certainly immune from further judicial scrutiny. This is an important decision for its discussion of the “informed” approval prerequisite to a Corwin defense. This aspect of Corwin turns on thoroughly-developed standards under Delaware law regarding what is or is not material to the stockholders' decision-making. In that way, the decision is not novel. Yet, because a disclosure violation may prevent what would otherwise be an early dismissal of a breach of fiduciary duty action against directors for damages, the issue is of heightened importance post-Corwin. In the Court’s own words, this case “offers a cautionary reminder to directors and the attorneys who help them craft their disclosures: ‘partial and elliptical disclosures’ cannot facilitate the protection of the business judgment rule under the Corwin doctrine.” Here, the material undisclosed facts concerned a founder’s early dealings with the private equity buyer, pressure on the board, and the degree that this influence may have impacted the sale process structure. The stockholder plaintiffs’ arguments were aided substantially by documents obtained in connection with a pre-suit books and records demand. That is another area of increased importance post-Corwin, given the unavailability of a Corwin defense in that setting and the ability to obtain documents that might help one plead around a later Corwin defense.
When seeking stockholder votes it is not always clear when the company must disclose an opinion of an individual director on the merits of the proposed transaction. This decision reviews the Delaware law and concludes that at least when the director involved is a founder and chairman and voices an opinion that the transaction is not good for the company, that opinion must be disclosed.
A board must disclose all information material to the stockholder vote for a transaction. Moreover, disclosures may be inadequate when they are buried in various places in a lengthy proxy statement. One piece of material information is conflicts involving the board’s advisors. The Court of Chancery is prepared to preliminary enjoin a transaction where the proxy omits or fails to sufficiently disclose material details concerning, for instance, a banker’s conflict. For example, the inadequately disclosed conflict warranting an injunction in this case involved the fees the buy-side banker expected to receive for its participation in debt financing for the deal.
Court of Chancery Targets “Deal Tax” Litigation By Increasing its Scrutiny of “Disclosure-Only” Settlements
M&A lawsuits and so-called “disclosure-only” settlements – where stockholder plaintiffs drop their requests to enjoin a deal and grant defendants broad releases primarily in exchange for supplemental disclosures to stockholders, followed by requests for six-figure attorneys’ fee awards – have proliferated in recent years. In turn, these lawsuits have faced increasing scrutiny from scholars, practitioners, and members of the judiciary, who assert that these ubiquitous settlements rarely yield genuine benefits for stockholders, threaten the loss of potentially valuable claims that have not been sufficiently investigated, and only serve the interests of opportunistic plaintiffs’ counsel and defendants happy to acquire a form of deal insurance through a broad release of class action claims challenging the merger. More ›
In this precedent setting decision, the Supreme Court holds that stockholders who are cashed out in a short-form merger may bring a class action for damages when there are violations of the duty of disclosure in the materials sent to them notifying them of the merger. In prior decisions, the Court of Chancery had reached somewhat inconsistent results in such cases, granting a quasi-appraisal remedy, but sometimes requiring stockholders to opt-in to be part of the stockholder group obtaining appraisal rights and also requiring an escrow of the merger consideration.
Here, the Supreme Court rejected both of those limits on the remedy. Instead, it held that all the minority stockholders had the right to be part of a class entitled to appraisal rights, subject to a right to opt-out of the class. In addition, stockholders do not have to escrow any of the merger consideration while the action is pending.
This result creates a "free rider" issue as there is little incentive for stockholders to opt-out. While it is possible the trial court will decide the fair value of their stock in the appraisal proceedings is less than the merger consideration, for smaller stockholders, the amounts in question may not justify the company enforcing any right to a refund.
Of course, the way out of this dilemma is to provide fair disclosure in the first place.