On October 28th, the Superior Court of New Jersey – in In re: Datascope Shareholders Litigation – denied plaintiffs motion to preliminarily enjoin the closing of a first step tender offer pending, among other things, corrective disclosure in a Schedule 14D-9. We have posted the decision in our “M&A Litigation” Portal.
Plaintiffs alleged that Datascope’s 14D-9 was materially misleading because, among other things, it failed to fully and fairly disclose:
– Datascope’s management’s financial projections;
– The calculations used by Datascope’s financial advisor to compare the proposed transaction to other deals and to compare Datascope’s value to that of other companies; and
– The extent of Datascope’s financial advisor’s fee conflict.
Defendants noted that the price being offered was an all-time high for Datascope stock and that since the June 4th announcement of the transaction, the stock market had plummeted and credit availability had diminished – thus, absent the presence of a competing/topping bid, the imposition of a preliminary injunction posed greater threat of irreparable harm to shareholders.
Defendants also asserted that plaintiffs failed to demonstrate a probability of success on the merits because the auction process was exemplary and the diligence and loyalty of the directors had not been called into question. Among other things, the defendants noted the reluctance of Delaware courts to enjoin a cash merger offering a premium in the absence of a competing bid.
Under the circumstances presented, the Court agreed: “Also, considering the current economic crisis the Court is naturally hesitant to preliminarily enjoin a tender offer at a such a premium price. It is not without precedent that a court takes into account the current economic climate in making its decision, as the Delaware Chancery court recently declined to preliminarily enjoin a merger, considering the “decidedly unstable market.'” [citing Wayne County Employees” Ret. Sys. v. Corti (Del. Ch. 2008)].
1. With regard to defendants’ failure to disclose management’s projections, the Court followed CheckFree rather than Netsmart, distinguishing Netsmart on the basis that the Netsmart proxy disclosed an early version of management’s projections while in Datascope “the topic of projections was never “broached” [in the Schedule 14D-9].”
2. Similarly, with respect to the disclosure regarding the analyses of Datascope’s financial advisor, the court was equally skeptical.
Among other things, the Court noted that: “The discussion of [the financial advisor]’s opinion (pages 12 to 18) consumes seven pages [of the 14D-9] and, among other things, summarizes each of the five lines of analysis undertaken by the investment bank.” Then the Court concluded that “the law is unsettled on [the board’s duty to disclose its financial advisor’s “black box” calculations]. . . . Accordingly, the Plaintiffs have failed to clearly and convincingly demonstrate a likelihood of success on the merits as to this aspect of their claim.”
Finally, with respect to Plaintiffs’ claim that the board violated its duty of disclosure by failing to disclose the amount of fees payable to its financial advisor contingent upon the consummation of the transaction, the Court noted that the 14D-9 disclosed the aggregate amount of the fees payable to the financial advisor [$6.9 million] and that a substantial portion of the fee was contingent upon completion of the proposed transaction. The Court found that such disclosure was adequate to inform shareholders of any attendant bias a shareholder might elect to infer.
Note that Schedule 14D-9 does not require long form disclosure of the analyses underlying a fairness opinion” and, despite the Delaware Chancery Court’s decision in Pure Resources, it is highly debatable that Delaware law (as held by the Delaware Supreme Court in Skeen) requires such disclosure.