DealLawyers.com Blog

Lawyers who work with public companies tend to think of incorporation by reference as an SEC issue – and generally assume that if incorporation information by reference to another document is permitted under SEC rules, then we’re good to go. This Morris James blog flags the Chancery Court’s recent decision in Zalmanoff v. Hardy (Del. Ch.; 11/18), which provides a reminder that this isn’t necessarily the case in Delaware.

While the SEC may have signed-off on the “access equals delivery” model for many situations, Delaware isn’t there yet – in fact, it rather grumpily adheres to the view that “our law does not impose a duty on stockholders to rummage through a company’s prior public filings to obtain information that might be material to a request for stockholder action.”

In Zalmanoff, the plaintiff challenged the adequacy of using information in a 10-K that accompanied a proxy statement to satisfy the directors’ fiduciary duty of disclosure. VC Slights held that the defendants did satisfy their duty of disclosure, and he spent several pages of his opinion sorting through precedent about how information must be delivered to stockholders.  The blog provides a helpful summary of the current state of Delaware law on this topic:

This decision holds that it is acceptable to make the needed disclosures to stockholders by sending them both a Form 10-K and proxy statement at the same time. However, this does not mean that it is possible to rely on past SEC filings when a proxy statement omits material information that was disclosed previously. The key is that the various documents need to be disclosed together.

It’s worth noting that Zalmanoff didn’t involve a merger – it involved a challenge to an executive comp plan, and the decision shouldn’t be read as prohibiting incorporation by reference to documents that aren’t delivered to shareholders. For example, in Gilliland v. Motorola (Del. Ch.; 10/04), the Chancery Court seemed to endorse incorporation by reference to publicly filed documents, at least if a summary of the information contained in the other documents is provided:

In cases where adequate information is, in fact, publicly available, it will always be a simple exercise to identify the relevant disclosure documents and either include them with the notice, or extract and disclose summary information from them, and advise stockholders how to obtain more complete information.

But the bottom line is that when dealing with Delaware’s fiduciary duty of disclosure, you need to give some thought to how you deliver information about your deal to shareholders – and not just assume that if the information is incorporated by reference under SEC rules, you’re home free.

– John Jenkins