DealLawyers.com Blog

November 26, 2018

Corwin Cleansing: No Audit? No Dice

This recent blog from Steve Quinlivan reviews the Delaware Chancery Court’s decision in In re Tangoe Stockholders Litig. (Del. Ch.; 11/18), where Vice Chancellor Slights held that company’s failure to provide audited financial statements & other disclosure shortcomings precluded its directors from relying on the Corwin doctrine in post-closing litigation.

The deal sounds like a complete mess – it involved a take private with a negative premium that took place in the shadow of, among other things, allegedly false SEC filings & the company’s inability to get a restatement completed. Despite these issues, the parties signed-up a deal. This excerpt from Steve’s blog describes what happened next:

Ultimately the Director Defendants recommended that stockholders tender into a negative premium deal. Inevitable litigation followed, and the Director Defendants moved to dismiss the Complaint. Their showcase argument was that they were entitled to business judgment rule deference under Corwin v. KKR Fin. Hldgs. LLC because a majority of disinterested, fully informed and uncoerced stockholders approved the Transaction. The Plaintiff claimed Corwin was not applicable because it had pled facts from which it may reasonably be inferred that stockholders were either coerced to tender or did so without the benefit of material information.

The Court found the facts pled supported a reasonable inference that stockholder approval of the negative premium transaction was not fully informed in the absence of audited financial statements and other adequate financial information about the Company and its value. According to the Court there was an information vacuum, which was compounded by the fact that the Company had failed to file multiple 2016 quarterly reports and had not held an annual stockholders meeting for nearly three years. The Court also noted that Board did not advise stockholders that all forensic accounting had been completed and only a formal audit remained, depriving stockholders the opportunity to wait and see the audited results.

Delaware courts have been pretty liberal in their application of Corwin, but the doctrine is premised on full and fair disclosure to the shareholders who approved the deal – and the Tangoe case makes it clear that it’s awfully hard to disclose your way through a financial fog as thick as pea soup.

John Jenkins