Page 27 - Delaware Lawyer - Winter 2020

a “high-stakes” transaction. The com- pany’s disclosures supported a reasonable inference that the CEO and founder had not yet decided whether the offered price was acceptable, but otherwise omitted his views. The defendants argued that no further disclosure was necessary because stockholders “could have guessed” from what was disclosed that the CEO had reservations about the transaction. The Supreme Court rejected the defendants’ argument, opining that the dissenting view of a “key board member” was ma- terial information, and that stockhold- ers should be fairly provided with the expressed views of their fiduciaries and not be left to speculate about facts any reasonable board advisor would find to be of importance. Corwin prescribes the disclosure of such critical information be- fore defendants can enjoy the benefit of business judgment protection.
Later that year, in Morrison v. Berry,7 the Supreme Court again invoked materi- ality in reversing the Court of Chancery’s dismissal of a stockholder’s claim under Corwin, concluding that the plaintiff stockholder had adequately alleged mate- rial facts not contained in a corporate dis- closure. In Morrison, a stockholder of The Fresh Market — after employing Section 220’s “tools at hand” — brought suit in connection with a going-private transac- tion between The Fresh Market and an affiliate of Apollo Global Management LLC (“Apollo”), alleging breaches of fi- duciary duties by the company’s founder and board of directors.
The Supreme Court determined that the company’s proxy statement was “materially incomplete,” because among other reasons, it omitted color from the facts that were disclosed that stockhold- ers would have considered material. For example, the Supreme Court found the depth of the founder’s (1) commitment to and clear preference for Apollo, and (2) threat to dispose his shares if Apollo was not selected as the buyer, was not fully stated. Similarly, the Supreme Court found the proxy did not fairly disclose the degree to which the founder influenced the process and, together with Apollo, ex- erted pressure on the board.
Following the Corwin, Appel and Morrison decisions, the Court of Chancery has analyzed disclosure claims more fully and closely.
Ringing a cautionary bell “to directors and the attorneys who help them craft their disclosures,” the Supreme Court reminded Delaware corporations that “‘partial and elliptical disclosures’ cannot facilitate the protection of the business judgment rule under the Corwin doc- trine.”8
Post-Corwin Chancery Court Application
Following the Corwin, Appel and Mor- rison decisions, the Court of Chancery has analyzed disclosure claims more fully and closely to determine whether com- plaints have set forth a substantial likeli- hood that “the disclosure of the omitted fact[s] would have been viewed by the rea- sonable investor as having significantly al- tered the ‘total mix’ of information made available.”9
For example, the Court of Chancery found that disclosure violations in two recent cases — Arkansas Teacher Ret. Sys. v. Alon USA Energy, Inc.10 and Reith v. Li- chtenstein11 — precluded dismissal of the operative complaints under Corwin.
In Alon USA Energy, Alon stockhold- ers challenged Delek US Holdings, Inc.’s 2017 acquisition of the remaining 52% of Alon’s common stock it did not already own. Delek had previously acquired 48% of Alon’s common stock in 2015, at which point it entered into a Stockholder Agree- ment. The stockholder plaintiff brought a class action alleging breach of the Stock- holder Agreement and breach of fiduciary duties among other claims.
Delek’s initial acquisition of Alon’s 48% voting stock was approved by Alon’s board of directors subject to a one-year standstill provision (as opposed to the three-year period under Section 203 of the Delaware General Corporation Law (DGCL)).12 However, during that abbre- viated period, Alon and Delek engaged in substantive negotiations concerning Delek’s acquisition of the remaining 52% of Alon’s stock it did not already own. In 2017, Alon’s board and stockholders ap- proved Delek’s proposal to acquire the remaining 52% of Alon common stock at a price significantly lower than it had paid in 2015.
The Court found that the complaint pleaded sufficient facts to support the plaintiff’s claims, and also properly stated disclosure claims that the proxy failed to fully characterize the material facts. For example, the Court held that the defen- dants’ disclosure that the members of the Special Committee established by Alon’s board of directors raised questions con- cerning the Committee’s establishment without providing the resolution, in turn, raised a credible inquiry over whether the Special Committee fully understood its scope of authority. That is, resolution of the Special Committee’s questioning of its authority was material information that was not disclosed to stockholders, potentially in violation of the directors’ fiduciary duties.
The Court of Chancery similarly found materially misleading disclosures in Reith. There, a stockholder of Steel Connect, Inc. (“Steel Connect”) challenged (1) a preferred stock issuance to Steel Partners Holdings, L.P. (“Holdings”) — which already owned over a third of Steel Con- nect’s stock — and (2) an equity grant to three directors.13 The Court found the disclosures concerning the challenged eq- uity grants fell short of the required “dis- closure or fair summary of all of the rele- vant terms and conditions of the proposed plan of compensation,14 together with any material extrinsic fact within the board’s knowledge bearing on the issue” of a plan of compensation. The defendants had made reference to the fact that the equity grants were made pursuant to an equity
WINTER 2020 DELAWARE LAWYER 25