January 30, 2008

Financial Advisor Disclosure: Globis Partners v. Plumtree

From Kevin Miller of Alston & Bird: In a recent Delaware Chancery Court decision – Globis Partners v. Plumtree – the court granted defendants’ motion to dismiss claims alleging, among other things, that Plumtree Software’s board had breached its duty of disclosure by among other things, omitting information from the merger proxy relating to the financial analyses performed by Jeffries, Plumtree’s financial advisor. Here is a copy of the opinion.

Globis contended that Defendants should have disclosed the discount rate and the rationale for using different sets of comparable companies in different analyses but the court concluded that Globis had not shown that the proxy statement did not contain “a fair summary of the substantive work performed by Jefferies.” At best, the court concluded that plaintiffs had merely shown that such omitted information would have been helpful in valuing Plumtree’s stock. But Delaware law does not
require stockholders be “given all the financial data they would need if they were making an independent determination of fair value.”

In particular, citing Skeen v. Jo-Ann Stores and Pure Resources as well as the more recent CheckFree and Netsmart decisions, the court found that:

“None of these claimed omissions is actionable as a matter of law. Plaintiffs conclusory statement, “[w]ithout this information, Plumtree shareholders were unable to determine the true value of Plumtree,” does not meet its burden of proving materiality. Omitted facts are not material simply because they might be helpful. [A] disclosure that does not include all financial data needed to make an independent determination of fair value is not per se misleading or omitting a material fact. The fact that the financial advisors may have considered certain non-disclosed information does not alter this analysis. Given the extensive disclosure of the critical features, purposes, and likely effects of the Merger, none of the omitted information could have been viewed by a reasonable shareholder as significantly altering the total mix of information made available to her. [A] reasonable line has to be drawn or else disclosures in proxy solicitations will become so detailed and voluminous that they will no longer serve their purpose.”

Finally, the plaintiff’s challenged the failure to provide meaningful disclosure regarding Jefferies fees, because the proxy statement merely stated that they were “customary”. However, the court found that: “Without a well-pled allegation of exorbitant or otherwise improper fees, there is no basis to conclude the additional datum of Jefferies’ actual compensation, per se, would significantly alter the total mix of information available to stockholders.”

Court of Chancery Dismisses Revlon and Disclosure Claims Against Third Party Merger

And some thoughts from Travis Laster on the same case: In a decision issued November 30, Vice Chancellor Parsons dismissed the complaint in Globis Partners v. Plumtree Software, a purported stockholder class action alleging that the directors of a software company had breached their fiduciary duties in connection with the sale of the company to an unrelated, strategic buyer. The opinion is noteworthy for several reasons.

First, despite acknowledging that the directors were subject to Revlon duties, the Vice Chancellor evaluated the directors’ conduct with a plain-vanilla application of the business judgment rule. Although this might at first seem puzzling, it appears to have been driven by the plaintiffs’ approach to the case rather than by some new doctrinal twist. The stockholder plaintiffs’ complaint did not focus on the process employed by the directors in selling the company, but instead alleged that the directors’ interests in selling the company were inconsistent with those of the stockholders. It was thus the plaintiffs that chose to frame their attack in terms of rebutting the business judgment rule. The Vice Chancellor ruled on the arguments that the stockholder plaintiffs made.

Second, the Vice Chancellor held that the acceleration of stock options generally will not create a conflict of interest for directors. He noted, however, that a conflict could arise and render the directors interested if the benefit flowing from the acceleration of the stock options is sufficiently substantial. This observation is logical and well taken. In evaluating potential interest from option acceleration, practitioners should consider whether the time value benefit of acceleration is material, whether there is a significant risk that the options might not otherwise vest, and whether there is any concern that the options might otherwise be lost or become worthless due to the financial condition of the company. In the absence of special circumstances, the general rule in Globis should control.

Third, the Vice Chancellor held that the defendants did not breach their disclosure obligations by failing to provide details about their financial advisors’ analysis and compensation. Most significantly, the Vice Chancellor held that it was enough to say that the investment banker’s compensation as “customary” and partially contingent, without disclosing the details. The Vice Chancellor also rejected the argument that the defendants were required to disclose the precise discount rate used by the financial advisor to determine the present value of estimated future share prices. According to the Vice Chancellor, the discount rate was immaterial in light of the defendants’ disclosure of the method used to derive that rate.

The Vice Chancellor’s analysis of the disclosure issues appears to have been significantly influenced by the Chancellor’s recent decision in Checkfree, in which the Chancellor expressed concern about overly voluminous and detailed disclosures. As I noted in commenting on that decision, Checkfree’s ruling on the non-disclosure of banker compensation stands in tension with other recent disclosure decisions, such as Express Scripts/Caremark. A company faces injunction risk if fails to fully disclose the details of the analysis undertaken by its financial advisors, the information on which that analysis was based, and the compensation the financial advisors received. A company may decide to run the risk, and it is certainly true that supplemental disclosures on these issues can provide handy settlement currency. A company should not, however, assume that minimalist disclosures will always be upheld.

Reading between the lines in Globis suggests that the outcome was influenced by key contextual factors such as (i) the third party, arms’ length nature of the deal, (ii) the post-closing posture of the ruling, (iii) the difficulty in crafting an adequate disclosure remedy, and (iv) the absence of a topping bid. Similar issues might play out differently in an MBO or controlling stockholder transaction, if the claims were pursued vigorously in the injunction context, or if the plaintiff was a topping bidder.