Seyfarth Synopsis: The Delaware Supreme Court recently held that a shareholder vote on a tender offer was not fully informed where the company did not disclose why its founder, chairman and largest stockholder abstained from approving the merger. The Delaware Supreme Court had previously held that when a transaction is approved by a fully informed, uncoerced vote of the disinterested shareholders, the transaction is subject to the business judgment rule, resulting in a far more deferential review by the court.1 The Court’s recent opinion provides practitioners with additional guidance on what constitutes a “fully informed” shareholder vote.
In 2016, the Board of Directors of a company that was the target of a tender offer (the “Company”) voted in favor of the Company’s sale to Apollo Global Management. The Board vote was unanimous, except for the abstention of the Company’s founder. Prior to the vote, the founder expressed concerns that the sale price was suboptimal due to alleged mismanagement issues and that it was not the right time to sell the Company. The Company disclosed the founder’s abstention, but did not disclose his reasons for doing so. Plaintiff stockholders commenced an action following the merger claiming that the Board had failed to disclose all material information regarding the merger because the Company did not disclose the reasons for the founder’s abstention. The Delaware Chancery Court in dismissing plaintiffs’ claims held that the reasons behind the abstention were not material, and the vote was fully informed.
The Delaware Supreme Court reversed the decision of the Chancery Court because it found the Company’s Schedule 14D-9 did not disclose material information regarding why the Company’s founder had abstained from approving the merger. The founder’s belief that the sale price was suboptimal due to alleged mismanagement issues and that it was not the right time to sell was material and needed to be disclosed in order for the shareholders to be fully informed.
The Court cautioned that the reason for a director’s dissent or abstention will not always be material and whether a fact must be disclosed requires a contextual analysis as to whether that fact would materially affect the shareholders’ decision or materially mislead shareholders if not disclosed. However, in this particular instance, the Court found that the lack of disclosure was materially misleading since the Company itself had described the founder as having a “unique understanding” of the Company’s opportunities and challenges, and an “in-depth knowledge about [the] business, including [the] customers, operations, key business drivers and long term growth strategies, derived from his 30 years of experience in the vacation ownership industry and his services as [the] founder and former Chief Executive Officer.” The Court also indicated that the founder’s dissent would have caught a shareholder’s attention, since the Schedule 14D-9 contained a detailed explanation of the pros and cons of the deal and why the Board voted in favor of it.
Appel suggests that companies must exercise caution going forward in deciding whether to disclose to shareholders certain facts relating to a director’s abstention or dissent. Although a director’s dissent may not need to be disclosed in every situation, where the director has a unique and extensive knowledge and the company otherwise provides a detailed description of the pros and cons of a deal, a director’s dissent will likely need to be disclosed to shareholders.