July 12, 2018

Corwin: “Partial & Elliptical” Disclosures Don’t Cut the Mustard

Earlier this week, in Morrison v. Berry (Del. 7/18), the Delaware Supreme Court reversed an earlier Chancery Court decision & held that “partial and elliptical” disclosures provided to shareholders were insufficient to insulate the seller’s board from fiduciary duty claims under the Corwin doctrine.

The challenged disclosures related to the relationship between the company’s founder & the PE firm that ultimately acquired the company, together with other matters relating to his role and actions in the board’s sale process. The Court concluded that the plaintiffs had raised significant questions concerning whether the disclosures relating to these matters were misleading, and overruled the Chancery Court’s decision to dismiss their complaint.

This Morris James blog says the decision provides insights into Corwin’s “fully-informed” shareholder approval requirement:

Corwin holds that approval of a transaction by a fully-informed, uncoerced majority of the disinterested stockholders invokes the deferential business judgment standard of review for a post-closing damages action, making the transaction almost certainly immune from further judicial scrutiny.

This is an important decision for its discussion of the “informed” approval prerequisite to a Corwin defense. This aspect of Corwin turns on thoroughly-developed standards under Delaware law regarding what is or is not material to the stockholders’ decision-making. In that way, the decision is not novel. Yet, because a disclosure violation may prevent what would otherwise be an early dismissal of a breach of fiduciary duty action against directors for damages, the issue is of heightened importance post-Corwin.

In the Court’s own words, this case “offers a cautionary reminder to directors and the attorneys who help them craft their disclosures: ‘partial and elliptical disclosures’ cannot facilitate the protection of the business judgment rule under the Corwin doctrine.” Here, the material undisclosed facts concerned a founder’s early dealings with the private equity buyer, pressure on the board, and the degree that this influence may have impacted the sale process structure.

The blog also highlights the role that a pre-suit books & records demand played in bolstering the plaintiffs’ arguments – and points out that this is “another area of increased importance post-Corwin, given the unavailability of a Corwin defense in that setting and the ability to obtain documents that might help one plead around a later Corwin defense.”

John Jenkins