A recent opinion from the Delaware Court of Chancery reaffirmed the importance of bringing disclosure claims before closing (when steps can still be taken to achieve an informed stockholder vote), and the difficult hurdles faced by a plaintiff pursuing disclosure claims after closing.
In An Nguyen v. Michael G. Barrett, et al., C.A. No. 11511-VCG (Del. Ch. Sept. 28, 2016), the plaintiff brought pre-close claims alleging inadequate price and process, as well as some thirty alleged disclosure violations, in connection with AOL’s acquisition of Millennial Media, Inc. But the plaintiff only pursued preliminary injunctive relief in connection with one disclosure claim, which involved purportedly material financial information regarding unlevered, after-tax free cash flow projections prepared by the target’s financial advisor. After truncated briefing and oral argument, the Court denied the plaintiff’s motion for a preliminary injunction.
After stockholders “overwhelmingly” chose to tender into the merger and the transaction closed, the plaintiff amended the complaint to seek damages for two alleged disclosure violations. The first was the same claim regarding unlevered, after-tax free cash flow projections that had been rejected at the preliminary injunction phase. The second was a claim that the proxy failed to disclose the percentage of the financial advisor’s fees that was contingent on the completion of the merger, stating only that “a substantial portion” was contingent. This claim had been one of the thirty pled in the earlier complaint, but plaintiff had not pursued it during the preliminary injunction phase. The defendants moved to dismiss the case.
Plaintiff’s counsel argued that recent decisions had indicated a “regime change” under which the Court would be more favorably disposed to address disclosure claims after closing, citing Chester County Retirement System v. Collins, C.A. No. 12072-VCL, at 21:16–23 (Del. Ch. Mar. 14, 2016) (TRANSCRIPT), and Johnson v. Driscoll, C.A. No. 11721-VCL, at 45:19–46:5 (Del. Ch. Feb. 3, 2016) (TRANSCRIPT). Vice Chancellor Glasscock disagreed, stating: “To be clear, where a plaintiff has a claim, pre-close, that a disclosure is either misleading or incomplete in a way that is material to stockholders, that claim should be brought pre-close, not post-close.” The Court emphasized that stockholders have a right to a fully informed vote, which could not be remedied after the stockholder vote had taken place.
The Court also explained the different standards that apply when evaluating allegations at the pre-close preliminary injunction stage, as compared to the post-close motion to dismiss phase. In order to support a pre-close disclosure claim in a preliminary injunction motion, a plaintiff must demonstrate “a reasonable likelihood of proving that the alleged omission or misrepresentation is material.” To support a post-close disclosure claim, however, “a plaintiff must allege facts making it reasonably conceivable that there has been a non-exculpated breach of fiduciary duty by the board in failing to make a material disclosure.” In other words, the plaintiff must allege facts showing disloyalty or bad faith, including in connection with allegedly incomplete disclosures. The Court found that the plaintiff had failed to plead such facts for the two allegedly missing disclosures and dismissed the case.
Interestingly, the Court observed that “a salutary incentive” could be provided by finding disclosure claims that were pled but not pursued before closing to be waived. Nonetheless, the Court went on to determine that the second disclosure claim failed on the merits, regardless of whether it was waived. This echoes a point made by Chancellor Bouchard in City of Miami Gen. Employees v. Comstock, No. CV 9980-CB, 2016 WL 4464156 (Del. Ch. Aug. 24, 2016), that there was “persuasive force” to the argument that the doctrine of laches should bar disclosure claims made for the first time in a post-closing action for damages. In that case, the court also went on to decide the disclosure claims on the merits.
Although in these two cases post-closing disclosure claims were considered on the merits, the Court appears to be concerned about plaintiffs’ calculated delay in pursuing disclosure claims only after a stockholder vote, when defendants no longer have the opportunity to supplement disclosures and potentially moot claims. We expect the Court to continue to focus on ensuring that stockholders receive the most complete disclosure possible before any vote takes place. This is particularly true given the recent decisions in Singh v. Attenborough, 137 A.3d 151 (Del. 2016), and Corwin v. KKR Financial Holdings, 125 A.3d 304 (Del. 2015), providing for the extinguishment of all claims other than waste after informed, disinterested stockholder approval of a merger.