January 3, 2011

Delaware Chancery Enjoins Merger Vote Pending Corrective Disclosures

Here is news from Tom Bayliss of Abrams & Bayliss:

On December 20th, the Delaware Court of Chancery issued this bench ruling enjoining a special meeting of stockholders of Art Technology Group, Inc. (“ATG”) that had been scheduled to obtain stockholder approval of ATG’s approximately $1 billion acquisition by Oracle Corporation (also see this transcript). Vice Chancellor J. Travis Laster found that the proxy statement disseminated in advance of the ATG special meeting was materially deficient because it failed to disclose approximately $24 million in payments made by Oracle to Morgan Stanley, ATG’s financial advisor, in connection with unrelated services during the previous two years.

At the time, the Court indicated that it would likely issue a written opinion unless the parties resolved their dispute by agreeing on a proxy supplement – the parties ended up submitting competing forms of order in an attempt to memorialize the Court’s injunction ruling. On December 21st, Vice Chancellor Laster heard arguments from the parties on the form of order and gave the following guidance from the bench:

“What’s really driving this, in my mind, is to ensure that stockholders have a sense of the financial advisors’ incentives, not only in connection with the current deal … but also in terms of historical buy-side work that might cause Morgan Stanley or a stockholder to believe that Morgan Stanley had some interest in pleasing the buyer or maintaining good relations to the buyer.”

“[I]t struck me that stockholders would want to know and that it would be material to stockholders to find out, as here, for example, that fees during the period covered by the background of the merger section and, hence, deemed by the parties to the merger agreement to be material to the decision were, in fact, larger in favor of Oracle than in favor of ATG in the aggregate.”

“[W]hat I think is material is really the aggregate nature of the fees. I do think it should be broken down by year, but I don’t think there needs to be … assignment-by-assignment discourse.”

At the close of the hearing, Vice Chancellor Laster confirmed that he would not issue a written opinion and this order was issued shortly afterwards. The Court indicated that the ATG stockholder meeting should be convened and then adjourned for at least ten days following the issuance of any corrective disclosures (which could be disseminated via SEC Form 8-K). The Court declined to require an injunction bond but questioned the Court of Chancery’s traditional reluctance to require bonds to sustain disclosure-based injunctions. The Court also mused about the potential applicability of the Delaware Supreme Court’s recent decision in Guzzetta v. Service Corporation of Westover Hills (Del. Nov. 9, 2010) (reversing Court of Chancery’s determination of an injunction bond in a real property dispute).