December 16, 2020

Disclosure Claims: Another CEO Ends Up Holding the Bag

Last month, I blogged about the Chancery Court’s decision in In re Baker Hughes Merger Litigation, in which a seller’s CEO was left holding the bag on fiduciary duty claims arising out of allegedly misleading disclosure in its merger proxy statement. The company’s directors were dismissed out of the case, because all claims against them also involved the duty of care, and were thus exculpated by a Section 102(b)(7) charter provision.

In City of Warren Gen. Employees Ret. Sys. v. Roche, another CEO recently found herself in a very similar situation – only this time, the plaintiff didn’t even bother bringing a lawsuit against the directors.  Instead, it zeroed in on the CEO and CFO of Blackhawk Networks, alleging that they breached their duty of loyalty by manipulating the board into approving a sale of the company, and that they breached their duty of care by disseminating misleading proxy materials relating to the transaction.

Vice Chancellor Fioravanti dismissed the loyalty claims against the CEO & CFO, as well as the proxy-related claims against the CFO, but he declined to dismiss those claims against the CEO. The Vice Chancellor concluded that the complaint adequately pled both that the proxy statement contained material misstatements and omissions & that the CEO had participating in preparing it. At the motion to dismiss stage, these allegations were sufficient:

For the reasons discussed above, the Complaint has alleged that Roche may be subject to liability for non-exculpated gross negligence to the extent that she was involved in preparing a materially misleading proxy. The Complaint has also adequately pleaded reliance because, at the pleading stage, the Complaint need not prove “actual reliance on the disclosure, but simply that there was a material misdisclosure.” Metro Commc’n Corp. BVI v. Adv. Mobilecomm Techs., Inc., 854 A.2d 121, 156 (Del. Ch. 2004). The Complaint need not plead that omissions or misleading disclosures were so material that they would cause a reasonable investor to change his vote.

The Vice Chancellor also concluded that the plaintiff adequately alleged damages, and that if it ultimately proved that the CEO committed a non-exculpated breach of the duty of disclosure, then damages could be awarded using a quasi-appraisal measure.

John Jenkins