DealLawyers.com Blog

Wednesday’s Chancery Court decision in Dodiya v. Franklin, et al. (Del. Ch., 8/26) is one of the few decisions to date interpreting amended Section 144 of the DGCL, but the facts were such that the Chancery Court’s finding that the Section 144(a) safe harbors were unavailable at the pleading stage because it was reasonably conceivable that the board acted with gross negligence and that the stockholder vote was uninformed is unlikely to shed much light on the application of Section 144(a) to an ordinary sales process. That’s because, as Vice Chancellor Will explains:

The complaint details a striking breakdown in corporate governance. A conflicted CEO leaked material, nonpublic information to his father’s company, which then submitted a merger proposal. Upon discovering the leak, the board demanded that the CEO sign a confidentiality undertaking. When he refused, he was placed on a leave of absence. Yet the board restored his access to sensitive and process-related information amid negotiations with his father’s company. The proxy then assured stockholders that he had been entirely walled off from the process—an assertion the pleaded facts belie.

These are not the ordinary imperfections of a sale process. The complaint describes an extreme scenario where a board acted with reckless indifference to its own safeguards against a known leak, putting the integrity of the process at risk.

But another of the plaintiff’s claims, that an uninformed vote violated Section 203, may have broader applications. Especially because, two years ago, John shared a Davis Polk memo saying that the plaintiffs’ bar has discovered Section 203 of the DGCL – the Delaware Takeover Statute – and has recently been asserting claims based on alleged non-compliance with its requirements in M&A litigation.

Section 203 prohibits certain transactions between a Delaware corporation and an “interested stockholder,” which is defined generally to mean a beneficial owner of shares representing 15% or more of the company’s voting power. The statute prohibits business combinations with an interested stockholder for a period of three years, subject to certain exceptions that weren’t applicable in the case.

As noted above, VC Will had already determined it was reasonably conceivable that the stockholder vote was uninformed, but she found that had no bearing on Section 203.

A supermajority of Whole Earth’s non-interested stockholders voted to approve the merger. Despite that approval, the plaintiff contends that the vote did not comply with Section 203(a)(3) because it was uninformed. The plain and unambiguous text of Section 203(a)(3) does not require that a stockholder vote be “informed” or that stockholders receive any particular information before the vote. Courts may not “engraft upon a statute language which has been clearly excluded therefrom by the Legislature.” When the General Assembly has intended to impose a statutory requirement that stockholders receive information in connection with a vote, it has said so explicitly in legislation pre- and post-dating the adoption of Section 203 [. . .] That other DGCL provisions require the disclosure of certain information does not mean Section 203 must be read to include the same requirement.

Citing one case that supported plaintiff’s argument, VC Will said:

I respectfully decline to adopt the plaintiff’s reading of Alon as categorically importing an informed vote requirement into Section 203(a)(3). The court in Alon did not address the fact that the statute’s plain text lacks an informed vote requirement. The court relied entirely on common law precedent concerning the validity and effect of stockholder approval. The common law duty of disclosure does not dictate statutory compliance; rather, I am bound by the statute’s text. The plaintiff cites no other case that has taken the approach it advocates for.

We’ll be posting this case and any related memos in our “Controlling Shareholders” and “Antitakeover Provisions/Laws” Practice Areas.

– Meredith Ervine