On March 4, 2011, the Delaware Chancery Court enjoined a target from holding a shareholder meeting to vote on the approval of a merger agreement pending dissemination of curative proxy disclosure of both:
- the amount of contingent fees to be paid to its investment adviser
- the negotiations regarding the compensation that the CEO and president of the target would receive when he joined the acquirer after consummation of the merger
The proxy statement disclosed that the investment banker would “be paid a customary fee, a portion of which is payable in connection with the rendering of its opinion and a substantial portion of which will be paid upon completion of the Merger.” The proxy statement did not disclose, however, the amount of compensation the banker would receive nor, more importantly, did it quantify the amount of the fee that was contingent – which was approximately 98%. The defendants pointed out that contingent fees are customary and there is no magic as to when something more than a disclosure that a “substantial portion” of the fee is contingent is required. The court agreed that fixing a line is difficult but stated that “regardless of where that ‘line’ may fall, it is clear that an approximately 50:1 contingency ratio requires disclosure to generate an informed judgment by the shareholders as they determine whether to rely upon the fairness opinion in making their decision to vote for or against the [t]ransaction.” The court also required disclosure of the amount of the fees paid to the investment banker.
The proxy statement also disclosed that the CEO did not have discussions with the acquirer regarding the terms of his potential employment with the acquirer before December 14, 2010. However, the plaintiffs asserted that the CEO knew at such time that he would be employed by the acquirer. The defendants claimed that before that date, there were only “initial exploratory discussions” regarding employees that would be retained after the merger closing, and that no discussions occurred regarding the specific terms of his potential employment before December 14. The court rejected the defendants’ arguments and noted that even though specific terms were not elicited until later in the process, the CEO was aware that he would receive an offer of employment from the acquirer at the same time he was negotiating the terms of the transaction, including the price, and this information should have been disclosed to shareholders. As a result, the court required disclosure of the date on which the CEO learned from the acquirer that it would employ him after the closing of the merger.
The court rejected claims that the proxy statement contained material omissions because the financial advisor should have generated a valuation based on the target’s own internal projections, rather than using street projections. The court noted that “quibbles with a financial advisor’s work simply cannot be the basis of a disclosure claim.”
The court also rejected the claim that the proxy statement did not detail the exact prices each side offered at every step of negotiations. The court noted that under Delaware law, a “play-by-play” description is not required and that the proxy statement described the negotiation process in sufficient detail that shareholders could decide for themselves that the offer price was the product of arms’ length negotiation and whether the negotiations succeeded in maximizing shareholder value.
The plaintiffs also asserted that the price offered was an unfair price resulting from an unreasonable process. Since the board was independent, had a deep knowledge of the company’s industry and employed a robust and sophisticated process, the court refused to second-guess the board’s conduct.