July 25, 2017

Corwin: Disclosure of Director’s Reasons for Abstaining Not Required

This Sherman & Sterling blog reviews the latest decision to follow Corwin’s approach to post-merger claims.  In Appel v. Berkman (Del. Ch. 7/17), Vice Chancellor Montgomery-Reeves concluded that tendering shareholders’ decision to participate in a tender offer was fully-informed and non-coerced.  Accordingly, she applied the business judgment rule to the board’s actions & dismissed the plaintiff’s claims.

The target’s Schedule 14D-9 disclosed that its chairman & founder abstained from voting on the transaction. However, the plaintiff alleged that the disclosure in the target’s Schedule 14D-9 was inadequate, because it failed to disclose the reasons behind the chairman’s decision to abstain from voting on the deal. The plaintiff also contended that the amount of the fees paid by the buyer to the target’s financial advisor for unrelated work should have been disclosed.

This excerpt says that neither of those arguments got much traction with the Vice Chancellor:

First, plaintiff asserted that Diamond failed to disclose its chairman’s “disappointment” with the merger.  But according to the Court, “the significant weight of twenty-five years of Delaware authority” did not require that an individual director explain “the grounds of their judgment for or against a proposed shareholder action,” and the Schedule 14D-9 issued in connection with the transaction disclosed the chairman’s abstention.

Second, plaintiff contended that Diamond’s disclosures regarding the financial advisor’s relationship with Apollo were inadequate.  The Court held otherwise.  Specifically, it found that the 14D-9 did in fact disclose relationships with Apollo portfolio companies that plaintiff alleged were omitted.

The Court also determined that disclosure of the amount of compensation paid by Apollo to the financial advisor was not required in light of the extensive disclosures that the financial advisor “has provided ‘and is currently providing’ services to Apollo-affiliated entities and has been and will be receiving compensation from Apollo” and because plaintiff’s allegation of materiality was conclusory.  The Court noted that “prudence would counsel in favor of disclosing the amount of compensation,” but concluded that “the alleged disclosure violation does not prevent the application of Corwin in light of the disclosures already provided.”

The Vice Chancellor’s decision on the fee disclosure may be somewhat surprising given the Chancery Court’s recent hard line on banker conflicts & fee disclosure. However, in addition to noting that the disclosure of the relationships was extensive, the opinion suggests that the overall amount of the fees received was not material to the financial advisor.

John Jenkins