April 12, 2021

Disclosure: Mass. Court Says No Duty to Disclose Preliminary Merger Negotiations

This Goodwin memo reviews a Massachusetts trial court’s recently decision in Athru Group Holdings v. SHYFT Analytics, (Mass. Supr. Ct.; 3/21).  In that case, the Court dismissed breach of fiduciary duty, fraud and contract claims against a Delaware corporation and its directors arising out of the non-disclosure of preliminary merger negotiations.  Here’s an excerpt addressing the factual background & the Court’s decision to dismiss the fiduciary duty claims:

According to the complaint, Athru initially owned one-fifth of SHYFT and subsequently sold its stake for $0.75 per share to eleven of the defendants, including Medidata, pursuant to a stock purchase agreement.  Six months later, Medidata paid $2.95 per share to buy all the capital stock and vested stock options of SHYFT that it did not already own.  Athru contended that it would not have sold its stake in SHYFT if it had known of Medidata’s purported interest in purchasing SHYFT and/or that SHYFT was willing to be acquired.

With respect to Athru’s breach of fiduciary duty claims against two SHYFT directors, the court held that these claims failed because, among other reasons, the complaint did not adequately allege that either defendant had a fiduciary duty to disclose information related to Medidata’s purported preliminary interest in acquiring SHYFT, or SHYFT’s alleged acquisition interest, at the time that Athru sold its SHYFT shares.

Given that SHYFT was a Delaware corporation, the court found that this issue was governed by Delaware law.  The court explained that although a director’s duties of care and loyalty may require the director to disclose information in certain instances, there was no duty to disclose where purported discussions surrounding the merger were preliminary and the parties had not yet agreed to any material terms (such as price and structure of the transaction).

In dismissing the fraud claims, the Court disagreed with the plaintiff’s allegations that defendants who were parties to the stock purchase agreement committed fraud by failing to disclose the alleged interest in merging SHYFT into Medidata. In doing so, it noted, among other things, that noted that the plaintiff had assumed the that SHYFT could be acquired subsequent to the sale of its shares, since the stock purchase agreement expressly contemplated a future acquisition of SHYFT.

It’s important to keep in mind that the defendants’ disclosure obligations were evaluated under Delaware law.  In reaching the conclusion that the preliminary merger negotiations were not subject to disclosure, the Court relied on the Delaware Supreme Court’s decision in Bershad v. Curtiss-Wright, (Del.; 12/87), which held that efforts to arrange mergers “are immaterial, as a matter of law, until the firms have agreed on the price and structure of the transaction.”

If the plaintiff had challenged non-disclosure of the preliminary negotiations under the federal securities laws, that claim would have been evaluated under the test established in Basic v. Levinson, 485 US 224 (1988). In Basic, the Court specifically rejected Delaware’s “price and structure” test, and instead held that materiality is a function of a contingent event’s probability and magnitude, both of which need to be assessed by the factfinder.

John Jenkins