DealLawyers.com Blog

From Travis Laster: “Back on October 18th, Chancellor Chandler denied a motion for a preliminary injunction challenging a proposed merger between CheckFree Corporation and Fiserv, Inc. The one-page letter issued by Chancellor Chandler on that same day promised a fulsome explanation for his decision “in the near future.” The Chancellor delivered on his promise on November 1st, with an opinion – In Re: CheckFree Corp. Shareholders Litigation – which provides some helpful guidance regarding disclosure obligations. In the opinion, Chancellor Chandler addresses and rejects each of plaintiffs’ three arguments for injunctive relief based on allegedly insufficient disclosures:

First, plaintiffs argued that CheckFree’s proxy was required to but did not disclose management’s projections for the Company, on which the Goldman Sachs relied for its fairness opinion. Distinguishing Netsmart and relying on the framework established in In re Pure Resources, the Chancellor found that the definitive proxy statement “contains an adequate and fair summary of the work Goldman did to come to its fairness opinion” and that management’s projections did not have to be disclosed. Chancellor Chandler noted that the proxy’s description of Goldman’s work spans seven pages and contains significant explanation about the valuation methods and data used by Goldman. Chancellor Chandler also noted that the proxy “never purports to disclose [management’s] projections” and “explicitly warns that Goldman had to interview members of senior management to ascertain the risks that threatened the accuracy of those projections.” The Chancellor held that “[t]hese raw, admittedly incomplete projections are not material and may, in fact, be misleading.”

Second, plaintiffs argued that the proxy should have disclosed that the merger would likely extinguish a pending derivative action and that, by extinguishing the derivative action, one of CheckFree’s directors would be free from potential liability. The Chancellor found that plaintiffs’ likelihood of success on this disclosure claim was “far from strong” because (i) directors do not have to provide investors with legal advice and (ii) only one director had an ulterior motive in approving the merger, yet the merger was recommended by a unanimous vote of CheckFree’s directors.

Finally, plaintiffs argued that the proxy’s description of the merger’s background “lacks sufficient detail.” Plaintiffs only support for their argument was that “the background section spans less than two full pages.” Chancellor Chandler observed that “[t]his Court … does not evaluate the adequacy of disclosure by counting words” and found that, without additional support for this claim, plaintiffs failed to meet the requirements for injunctive relief.

In my view, practitoners should be cautious about viewing the Chancellor’s holding as a green light to leave projections out of proxy statements. The case law here is still developing, and there are enough precedents in favor of disclosure to create injunction risk. The better course will remain to include projections, at least until we receive further guidance from the Supreme Court.

Equally important, caution is warranted on the lack of a disclosure violation based on the extinguishment of a derivatve action. The derivative claims here only affected one director and had been preliminarily rejected by a federal court. Stronger claims affecting a majority or a significant portion of the board could well give rise to a disclosure claim. Facially more significant claims implicating a majority of the board and involving a high profile issue like stock option backdating could well be viewed differently.”

We have posted a copy of the opinion – as well as memos analyzing this case – in our “Disclosure” Practice Area.