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Background

Plaintiffs alleged that the company’s founder and his son, who together owned 9.8% of the company’s shares, had teamed up with the winning private equity bidder to acquire the company at a discount to fair market value pursuant to a tender offer. Plaintiffs contended that the 14D-9 failed to disclose that the founder (1) made “serious misrepresentations” to the board concerning his agreement with the private equity firm to roll over his equity interest if the firm reached a deal with the company; (2) indicated that he would not engage in an equity rollover with any other potential buyer; and (3) suggested that he would sell his shares if the company remained public. Plaintiffs further claimed that the 14D-9 failed to disclose that the board had formed a committee to consider strategic options not just because of the potential for activist stockholder pressure, but because “the directors were motivated by existing activist pressure.”

The Delaware Chancery Court dismissed the complaint based on the Corwin cleansing doctrine because a sizable majority of the outstanding shares were tendered into the merger. Morrison v. Berry, 2017 WL 4317252 (Del. Ch. Sept. 28, 2017). The court found the suit “present[ed] an exemplary case of the utility of [Corwin’s] ratification doctrine.” With respect to the alleged omissions, the court determined that the founder’s “threat[ ] to sell his shares on the market if a merger did not close” was “[t]he only factual lacuna in the disclosures that comes close to materiality.” However, the court stated that it was “not clear . . . how this would have affected the total mix of information disclosed; certainly, it would not have made investors less likely to tender if they knew that a large blockholder—the founder—was considering a sale if the deal was not consummated.”

Information May Be Material Even If It Would Not Necessarily Have Changed a Shareholder’s Vote

On appeal, the Delaware Supreme Court found defendants failed to “meet their burden for triggering application of the business judgment rule under Corwin.” Berry II, 2018 WL 3339992. The court explained that the key inquiry is “whether the stockholder vote was fully informed—that is, whether the [c]ompany’s disclosures apprised stockholders of all material information and did not materially mislead them.”

The Delaware Supreme Court stated that the “this materiality test does not require proof of a substantial likelihood that disclosure of the omitted fact would have caused the reasonable investor to change his vote,” as the Chancery Court had suggested. Rather, “[o]mitted information is material if there is a substantial likelihood that a reasonable stockholder would have considered the omitted information important when deciding whether to tender her shares or seek appraisal.” The Delaware Supreme Court explained that information may be material if it “could make a stockholder less likely to tender,” or if it is “the sort of information that would make a stockholder more likely to tender.” Information may also be material if it is something “a reasonable stockholder would generally want to know in making the decision, regardless of whether it actually sways a stockholder one way or the other, as a single piece of information rarely drives a stockholder’s vote.”

Here, the Delaware Supreme Court found the Corwin doctrine inapplicable because plaintiffs alleged “specific, material, undisclosed facts that a reasonable stockholder is substantially likely to have considered important in deciding how to vote,” including “‘troubling facts regarding director behavior.’” In so holding, the court cautioned that “[c]areful application of Corwin is important due to its potentially case-dispositive impact.” The court stated that “stockholders cannot possibly protect themselves when left to vote on an existential question in the life of a corporation based on materially incomplete or misleading information.”