June 26, 2017

Delaware: Not Material? Sometimes You Should Still Disclose

In a recent blog, Steve Quinlivan flagged a new Delaware Supreme Court decision in which Chief Justice Strine affirmed a Chancery Court’s decision to dismiss fiduciary duty & disclosure claims – but said that some additional disclosure would’ve made everybody’s life a little easier:

We affirm, although we note one troubling aspect of the record. The plaintiff’s complaint pointed out the failure of the target to the merger to disclose that the chairman of its special committee was considering joining the special committee’s outside counsel as a partner. That fact was disclosed within weeks after the merger’s closing by the law firm in a hiring announcement.

Although we, like the Court of Chancery, conclude that this fact was not material, one can understand why it caught the attention of the plaintiff, and prudence would seem to have counseled for bringing it to light earlier, especially given that the chairman’s intention to become a partner at that firm was going to become public in any event.

Although the information may not have been material, it had the potential to raise eyebrows – and thus gave the plaintiff something to throw against the wall in the hope that it might stick.  As the Chief Justice observed, not disclosing the chairman’s decision to join the firm  “raised needless questions, in a high-salience context in which both cynicism and costs tend to run high anyway.”  Disclosing the chairman’s new affiliation before the votes were counted would have taken those issues off the table.

John Jenkins