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Here’s a scenario that’s guaranteed to put a knot in any M&A lawyer’s stomach – on the eve of a target’s stockholders meeting to vote on a proposed stock deal, the buyer’s board announces that it’s conducting an internal investigation in response to a whistleblower complaint and that one of the buyer’s directors, who was also the CEO of the subsidiary implicated in the whistleblower complaint, has resigned. So, do you move ahead with the vote or postpone it? In this case, the target opted to move forward with the vote, and whether the target’s board breached its fiduciary duties in failing to delay the vote was the issue addressed by the Chancery Court in Campanella v. Rockwell, (Del. Ch.; 2/25).

The plaintiff alleged that both the investigation and the director’s resignation were material facts that should have prompted a decision to postpone the stockholder vote in order to conduct further due diligence and provide supplemental disclosure.  In support of allegations that the investigation was material, the plaintiff contended that its existence “imparted a new and significant slant” on disclosures in the proxy relating to the buyer’s general regulatory compliance & whether it conducted adequate due diligence when it acquired the subsidiary whose product line was the subject of the internal investigation. It also pointed to the fact that the buyer’s stock price dropped significantly after the investigation was announced.

Vice Chancellor Will rejected these arguments.  She noted that the investigation focused on a single, relatively small product line and that the buyer had disclosed that it did not believe the investigation would have a material adverse effect on its business.  She also noted that the plaintiff’s complaint contained no specific allegations calling into question the due diligence that the buyer conducted when it acquired the subsidiary.  Finally, she wasn’t impressed by the plaintiff’s sexiest argument – the post-announcement drop in the buyer’s stock price:

Campanella also suggests that the Investigation is material because Desktop Metal’s stock price declined after it was disclosed. His reasoning is circular: the stock price dropped because material information was announced, and the information was material because the price dropped. But a drop in stock price does not excuse a plaintiff from meeting her burden to identify a disclosure deficiency. Campanella’s theory is even shakier since the affected stock price is of a transaction counterparty and the stock of both companies was declining even before the Investigation was announced.

The Vice Chancellor similarly rejected the plaintiff’s arguments concerning the materiality of the director’s resignation. The most intriguing of those arguments was the plaintiff’s contention that the director’s resignation was linked to the internal investigation, but Vice Chancellor Will didn’t take the bait:

Campanella views El-Siblani’s departure as linked to the Investigation, bolstering the materiality of both events. But the only fact he presents for this belief is Desktop Metal’s refusal to answer a question from a reporter about any connection between the two events. This is the sort of “inferential leap” Delaware courts routinely reject. And even if it could be reasonably inferred that the events were connected, Campanella has failed to demonstrate that either event—taken alone or together—had a material effect on Desktop Metal’s financials that would have been important to ExOne stockholders.

The Vice Chancellor ultimately concluded that the plaintiff had not adequately pled that the stockholder vote was not fully informed, and therefore held that the transaction was subject to review under the business judgment rule in accordance with Corwin.

– John Jenkins