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Delaware Supreme Court Finds Failure to Disclose Director Dissent in M&A Transaction Material

by   |   February 20, 2018

The Delaware Supreme Court found the failure to disclose the Chairman of the Board’s dissent to a tender offer in a Schedule 14D-9 to be material in Appel v. Berkman.  The case arose from Diamond Resorts International’s board of directors recommendation to its stockholders that they sell their shares to a private equity buyer for cash in a two-step merger transaction involving a front-end tender offer followed by a back-end merger.

The Court noted the Schedule 14D-9 included a detailed recitation of the background leading to the merger, and the reasons for and against it. But notably absent from that recitation was that the company’s founder, largest stockholder, and still Chairman, Stephen J. Cloobeck, had abstained from supporting the procession of the merger discussions, and from ultimately approving the deal, because:

he was disappointed with the price and the Company’s management for not having run the business in a manner that would command a higher price, and that in his view, it was not the right time to sell the Company.

The Court of Chancery held that the complaint challenging the merger should be dismissed because the stockholders’ acceptance of the first step tender offer was fully informed, rejecting the plaintiffs’ argument that the omission of the Chairman’s reasons for abstaining rendered the proxy statement materially misleading.

According to the Delaware Supreme Court, the defendants’ argument that the reasons for a dissenting or abstaining board member’s vote can never be material is incorrect. The Court reasoned that because Delaware law gives important effect to an informed stockholder decision, Delaware law also requires that the disclosures the board makes to stockholders contain the material facts and not describe events in a materially misleading way.  Here, the founder and Chairman’s views regarding the wisdom of selling the company were ones that reasonable stockholders would have found material in deciding whether to vote for the merger or seek appraisal, and the failure to disclose them rendered the facts that were disclosed misleadingly incomplete. Therefore, the Delaware Supreme Court reversed the order dismissing the plaintiffs’ claims.

The Court noted its decision in no way implies that the reason for a particular director’s dissent or abstention will always be material. Rather, the Court noted that it adheres to the contextual approach that has long been Delaware law, which requires an examination of whether a fact— which can include the fact that a director shared with the board particular reasons for his position on an important transaction—would materially affect the mix of information, or whether the disclosure is required to make sure that other disclosures do not present a materially misleading picture.