September 22, 2023
Duty of Disclosure: Officers are In a Tough Spot
In Cygnus Opportunity Fund, LLC, et al. v. Washington Prime Group, LLC, (Del. Ch.; 8/23), the Delaware Chancery Court refused to dismiss breach of fiduciary duty allegations against the officers of an LLC arising out of alleged disclosure shortcomings in connection with a controlling members’ tender offer & subsequent squeeze-out of the minority holders. The Court held that officers owe the same fiduciary duty of disclosure as directors. However, as this excerpt from Cleary’s blog on the decision points out, the Court acknowledged that its decision puts officers in a tough spot:
The Court denied dismissal of the breach of fiduciary duty claims against the officers for failing to provide adequate disclosure in connection with the tender offer and merger. Analyzing Delaware case law, the Court concluded the officers may have had a duty of disclosure that is analogous to the duties owed by company directors, which, depending on the circumstances, may require disclosure in connection with a tender offer. The Court also held that, as fiduciaries, the officers may have had a duty to inform the minority holders of the material facts surrounding the squeeze-out merger, regardless of whether or not their approval is required.
Notably, the Court noted that officers’ fiduciary duty of disclosure owed to the minority investors is in significant tension with the officers’ duty of obedience to the board. Underscoring this “conundrum,” the Court explained that officers, as agents of the Board, may not act contrary to the board’s directives. Even so, officers do not have a duty to comply with directives that they have reason to know would expose them to criminal or civil liability, including with “directives that the officer[s] ha[ve] reason to believe would constitute a breach of fiduciary duty.”[ Here, the Court noted that “[i]t is reasonably conceivable that a duty of disclosure could exist in connection with a severely underpriced tender offer such that fiduciaries for the entity and its investors would have a duty to say something.”
The blog points out that the Court’s conclusion means that in connection with a merger or other significant event, officers must take reasonable steps to disclose material information to holders, even when a controller or the board may be reluctant to provide information.
– John Jenkins