June 5, 2024

M&A Disclosure: Del. Chancery Says Materiality Standard Doesn’t Vary

Last week, in Firefighters’ Pension System¬† v. Foundation Building Materials,¬†(Del. Ch.; 5/31), the Chancery Court addressed a variety of claims arising out of the 2020 sale of Foundation Building Materials to a private equity firm. In his 140-page opinion, Vice Chancellor Laster addressed a range of fiduciary duty and aiding and abetting claims against a variety of transaction participants. Among other things, the issues addressed in the Vice Chancellor’s opinion included the alleged wrongful diversion of merger consideration by the company’s controlling stockholder, flaws in the transaction process, and alleged disclosure shortcomings relating to, among other things, the relationship between the special committee’s legal and financial advisors and the company’s controlling stockholder.

Suffice it to say that this case provides a target rich environment for an M&A blogger. In fact, there’s so much going on here that Prof. Ann Lipton recently blogged about an aspect of the case that I haven’t even mentioned – VC Laster’s approach to Caremark claims raised as part of the litigation. In an effort to keep this blog digestible, I’ve decided to limit my comments to the Vice Chancellor’s response to the defendants’ argument that the challenged disclosures were not material, because stockholders weren’t asked to vote on the deal, but merely had the right to seek an appraisal.

VC Laster wasn’t sold on that argument. Instead, he held that the materiality standard for disclosures was the same regardless of whether stockholders were asked to vote or just had appraisal rights. In that regard, he cited the Delaware Supreme Court’s 2000 decision in Skeen v. Jo-Ann Stores, which rejected a similar argument, and observed that subsequent developments in Delaware law further reinforced the conclusion reached in that case:

The post-Skeen evolution of Delaware law has only reinforced the logic of using the same standard. In 2015, the Delaware Supreme Court held in Corwin that a fully informed stockholder vote will extinguish sale process claims that otherwise would be reviewed under enhanced scrutiny. The Corwin doctrine made it all the more clear that directors must disclose facts relating to potential breaches of fiduciary duty (although they need not self-flagellate) so that stockholders can evaluate whether to vote for the deal and give up those claims.

Starting in 2016, a trilogy of path-breaking Delaware Supreme Court decisions provided this court with pointed instruction about the relationship between the deal price in a third-party transaction and fair value in an appraisal. Under the trilogy, the merger consideration takes pride of place among possible valuation indications. Both proponents and critics of the trilogy assert that a court should only consider awarding fair value above the deal price if the facts would support a claim for breach of fiduciary duty under the enhanced scrutiny standard. It follows that fiduciaries must disclose facts relating to potential breaches of fiduciary duty (although they need not self-flagellate) so that stockholders can evaluate whether to seek appraisal.

It therefore does not matter for the duty of disclosure that stockholders were not asked to vote on the Merger. The same materiality standard applies.

The trilogy of Delaware Supreme Court opinions to which the Vice Chancellor refers are the Aruba Networks, Dell and DFC Global decisions. We’ve blogged about each of those decisions, and if you’re interested in reading more about them, our Aruba Networks blog includes links to our blogs on the other two decisions.

John Jenkins