Investment bankers play a central role in the exploration, evaluation, selection and implementation of strategic alternatives for Delaware companies. To enable stockholders to carefully assess how much weight to give an investment banker's analysis of a proposed strategic transaction, Delaware law requires full disclosure of a banker's compensation or financial interest, and other potential banker conflicts of interest in connection with the transaction. If the banker's financial interest in the proposed transaction is "material" and "quantifiable," full disclosure of the financial interest to stockholders is required under Delaware law. To obtain meaningful relief for the benefit of stockholders, the Delaware Court of Chancery has indicated its strong preference for plaintiffs to assert claims to correct disclosures to stockholders in advance of the stockholder vote on the proposed transaction.
In Vento v. Curry, C.A. No. 2017-0157-AGB (Del. Ch. March 22) (Bouchard, C.), the Court of Chancery held that the fees of buyer's investment banker for providing debt financing to the buyer for its acquisition of the seller were inadequately disclosed to the buyer's stockholders. Accordingly, the court issued a preliminary injunction of the vote of the buyer's stockholders until its banker's financial interest in the merger is fully disclosed.
The buyer, Consolidated Communications Holdings Inc., seeks to acquire FairPoint Communications Inc. in a stock-for-stock merger. Morgan Stanley served as Consolidated's lead investment banker and provided the only fairness opinion that Consolidated received in the merger. Morgan Stanley's affiliate committed to provide Consolidated with part of the $935 million in debt financing necessary for its acquisition of FairPoint. The proxy disclosed that Consolidated would pay Morgan Stanley a $13 million advisory fee for its buy-side investment banking work, which fee was contingent on consummation of the merger. The proxy also disclosed that Morgan Stanley had received $3 to $4 million in fees from Consolidated for other services during the prior two years. But, the proxy failed to disclose "any details concerning the amount of compensation Morgan Stanley expects to earn in connection with the financing of the merger." Piecing together information buried in the proxy and an 8-K, however, revealed that Morgan Stanley would receive about $5.6 million for providing debt financing to Consolidated to acquire FairPoint if the merger is approved.
The plaintiff, Richard Vento, a Consolidated stockholder, brought a single claim against the Consolidated board for breach of fiduciary duties for its alleged failure to fully disclose Morgan Stanley's financial interest in the merger to Consolidated's stockholders. The plaintiff moved to preliminarily enjoin a vote of Consolidated's stockholders until Morgan Stanley's financial interest in the merger was fully disclosed.
Court of Chancery Enjoins Stockholder Vote on Merger
In the plaintiff's motion for a preliminary injunction of the Consolidated stockholder vote, the court ruled that the plaintiff had demonstrated a reasonable probability of success on the merits that Consolidated's board had breached its fiduciary duties by failing to fully disclose its investment banker's financial interest in the merger. The court found that the amount of the investment banker's fees for providing debt financing to Consolidated to acquire FairPoint was "quantifiable," and the amount was also "material" because the magnitude of the fees would affect a stockholder's assessment of the independence of the banker. Therefore, to enable Consolidated's stockholders to assess how much weight to give the banker's analysis and fairness opinion in their vote on the merger, the amount of the banker's fees for providing debt financing was required to be fully disclosed to Consolidated's stockholders.
The court rejected the Consolidated board's assertion that stockholders could determine the amount of the banker's fees for providing the debt financing by piecing together information buried on page 248 of the proxy, with other information found in an equally lengthy 8-K filed more than 10 weeks before the proxy. The court reasoned that the disclosure of the banker's fees was inadequate under the "buried facts" doctrine. The court emphasized that "all material facts concerning a financial advisor's potential conflicts of interest [should] be disclosed in plain English in one place."
The court also found that the plaintiff had satisfied the second and third elements necessary to issue a preliminary injunction. The threat of an uninformed stockholder vote on a merger unequivocally constitutes irreparable harm to stockholders, who would otherwise be left with an inadequate remedy of speculative potential damages for disclosure deficiencies after the merger. In addition, the balance of equities weighed in favor of a preliminary injunction because the benefit of the added disclosure, which was essential for stockholders to cast an informed vote on the merger, outweighed the potential burden caused by a limited delay of the stockholder vote.
In sum, the court concluded that plaintiff had satisfied all elements necessary for a preliminary injunction, and enjoined the vote of Consolidated's stockholders until Consolidated supplemented its disclosures to "include a clear and direct explanation of the amount of financing-related fees" its investment banker will receive if the merger is approved.
Delaware courts continue to place great emphasis on the disclosure of financial advisor conflicts of interest even on the buy-side. To avoid a preliminary injunction of a stockholder vote, Vento emphasizes the importance of fully disclosing to stockholders "in a clear and transparent manner," and in one place, typically the proxy, the banker's complete financial interest and other potential banker conflicts of interest in connection with a proposed transaction.