In Nguyen v. Barrett, C.A. No. 11511-VCG, 2016 WL 5404095 (Del. Ch. Sept. 28, 2016) (Glasscock, V.C.), the Delaware Court of Chancery dismissed an amended complaint seeking damages for alleged disclosure violations in connection with a tender offer that had already closed. The Chancery Court’s opinion demonstrates the challenges plaintiffs face when they pursue non-exculpated disclosure claims for damages post-closing. It also shows that these challenges increase when the disclosure claims were previously pled but not pursued at the preliminary injunction stage — a time when the Chancery Court is still in a position to ensure stockholders are provided sufficient information to cast an informed vote. The Court confirmed that the preferred practice is for plaintiffs to pursue disclosure claims at that earlier stage.

Plaintiff’s original complaint challenged AOL, Inc.’s proposed acquisition of Millenial Media Inc. by alleging unfair process and process claims. After the tender offer commenced and the proxy was issued, plaintiff amended his complaint to add roughly thirty alleged disclosure violations. But, in seeking preliminary injunctive relief, plaintiff advanced only one alleged disclosure violation concerning certain allegedly undisclosed projected cash flows, which he called his “serious” claim. The Court found the proxy was not materially incomplete or misleading and denied injunctive relief. After the tender offer closed, plaintiff filed a second amended complaint repeating the price and process claims and certain disclosure claims, seeking damages.

Defendants moved to dismiss, arguing, in part, that they were shielded by an exculpation provision authorized under 8 Del. C. § 102(b)(7). During the briefing of the motion, the claims at issue narrowed to just two alleged disclosure violations: (1) the projected cash flows claim that plaintiff had advanced at the preliminary injunction phase and (2) a claim concerning the adequacy of disclosure of Millennial’s financial advisor’s contingency fee, which had been pled post-merger but not pursued in connection with plaintiff’s requested injunction.

The Court granted the motion to dismiss. The Court first highlighted the different standards that apply to disclosure claims pre- and post-closing. To sustain a motion for a preliminary injunction, a plaintiff must demonstrate “a reasonable likelihood of proving that the alleged omission or misrepresentation is material.” In contrast, to sustain a post-closing non-exculpated disclosure claim for damages, a plaintiff must allege facts “making it reasonably conceivable that there has been a non-exculpated breach of fiduciary duty.” To meet this standard, a plaintiff must demonstrate that either (1) a majority of the board was not disinterested or independent, or (2) the board was otherwise disloyal because it failed to act in good faith in failing to make a material disclosure.

The Court then turned to the two remaining claims in the case. With respect to the projected cash flows claim, the Court noted that even if it were to now find a material non-disclosure, the claim would still fail. Plaintiff had failed to allege facts showing it was reasonably conceivable that a majority of the board acted disloyally or acted in bad faith by deliberately withholding information or consciously disregarding their fiduciary duties.

The Court also deemed plaintiff’s second claim insufficient. Plaintiff alleged that the proxy statement’s disclosure regarding the financial advisor’s fee was “partial” and “inadequate” even though the proxy disclosed that a “substantial portion” of the financial advisor’s fee was contingent on the completion of the merger. Defendant argued that plaintiff had waived this claim by failing to pursue it in connection with the motion for preliminary injunction. Although the Court did not reach the waiver issue, it stated that a pre-closing disclosure claim should be pursued pre-closing. It explained that while a potential damages claim may be remedied post-closing, the important right to a fully-informed vote is lost if not pursued pre-closing. Thus, the preferred method for vindicating “truly material” disclosure claims is to bring them before the stockholders vote and the transaction closes. The Court ultimately found the disclosure of the contingent potion of the fee as “substantial” was sufficient because no alleged facts suggested the percentage was exorbitant or unusual. Plaintiff also failed to allege facts showing it was reasonably conceivable that any incomplete disclosure was the result of disloyalty or bad faith. This underscored by the fact that plaintiff himself had labeled the claim not “serious” by failing to advance it at the preliminary injunction stage. According to the Court, this concession foreclosed any inference that the board acted in bad faith by not amending the disclosure before the tender offer closed.

Nguyen underscores that plaintiffs assume considerable risk in pleading, but not pursuing through expedited proceedings for injunctive relief, disclosure claims before a merger closes. Although the Court in Nguyen did not hold expressly that failure to pursue such claims pre-closing waives the claim for damages post-closing, the opinion makes clear that waiver remains a real risk. At a minimum, not pursuing a disclosure claim in time to permit the Chancery Court to ensure an informed vote will color the Chancery Court’s view of the merits of the claim’s merits in later, post-closing proceedings.