September 9, 2019

Conflicts of Interest: 4th Cir. Says Undisclosed CEO Comp Discussions Potentially Material

I recenly blogged about the Chancery Court’s decision in  In re Towers Watson & Co. Stockholder Litigation, (Del. Ch.; 7/19), in which Vice Chancellor McCormick determined that the business judgment rule applied to decision of the seller’s board to enter into a merger agreement despite the CEO’s non-disclosure of the post-closing comp negotiations with the buyer.

The plaintiffs in the Chancery Court alleged that the CEO’s potential post-closing compensation improperly incentivized him to seek nothing more than the bare minimum required to get the deal done – and that the undisclosed information about his comp discussions was therefore material to the seller’s directors.  While VC McCormick was unmoved by those allegations, the plaintiffs in a federal merger objection lawsuit appear to have fared better with similar claims.

In In re Willis Towers Watson Proxy Litigation (4th. Cir.; 8/19), the 4th Circuit held that those undisclosed CEO comp discussions were sufficient support allegations that the company had omitted material facts in violation of Section 14(a) of the Exchange Act and Rule 14a-9.  In reaching this conclusion, the court specifically rejected one of the arguments that VC McCormick found compelling in the fiduciary duty litigation – the fact that it was public knowledge that the CEO’s comp would be higher after the deal.  Here’s an excerpt:

The defendants insist that disclosing the alleged compensation agreement wouldn’t have changed the total mix of information available to shareholders. In the defendants’ telling, the proxy statement and other publicly available information made it clear that Haley would be CEO of the combined company and that his compensation would increase after the merger.

It’s true that shareholders knew Haley would make more money after the merger. But they didn’t know that—before the merger had closed—Haley had entered secret discussions with Ubben, who was slated for a seat on WTW’s Compensation Committee, for a more than six-fold increase in his current compensation.

As alleged in the complaint, Haley had a powerful interest in closing the merger to get the compensation he’d discussed with Ubben, even if the terms were unfavorable for Towers shareholders. A jury could thus reasonably conclude that disclosing the secret compensation discussions between Haley and Ubben would have changed the total mix of information available to shareholders.

I don’t know that there are any broad conclusions to be drawn from this case about the differences between federal merger objection lawsuits & Delaware fiduciary duty litigation.  While the Chancery Court did tangentially address shareholder-disclosure claims, they weren’t at the center of the breach of fiduciary duty lawsuit, which focused primarily on the extent to which the failure to disclose the information in question to the directors impacted the board’s fulfillment of its fiduciary duties.  Still, the two courts’ different approaches illustrate the complicated realities of the post-Trulia deal litigation environment, where there’s not just a new sheriff in town, but often multiple sheriffs.

John Jenkins