Seyfarth Synopsis:  The Delaware Court of Chancery reaffirmed the increasing difficulty plaintiffs face in challenging M&A transactions in a September 28, 2016 opinion dismissing two post-closing disclosure claims.  The opinion sends a strong signal to practitioners that plaintiffs risk waiving any disclosure claims they fail to fully pursue pre-closing.


Shortly before AOL acquired Millennial Media, a Millennial Media stockholder filed an action in which the stockholder alleged a laundry list of around 30 disclosure violations.  The plaintiff stockholder advanced only one of those alleged violations at the preliminary injunction stage, which concerned certain cash flow projections relied upon by Millennial Media's financial advisor.  The court denied injunctive relief because it found the plaintiff failed to demonstrate that the alleged disclosure violation was material.  The merger subsequently closed with shares overwhelmingly tendering into the offer.  In this post-closing action, plaintiff sought damages for the cash flow projections-related disclosure claim and a second claim that was pled but not pursued pre-merger regarding the financial advisor's contingent-fee arrangement.  The Court dismissed both claims for failing to adequately allege that a majority of the Millennial board acted disloyally or in bad faith.


1. A Greater Burden Must be Met to Sustain a Post-Closing Disclosure Claim Than a Claim Brought Pre-Merger.  To sustain a pre-closing disclosure claim for injunctive relief, a plaintiff must demonstrate a reasonable likelihood of proving that the alleged omission or misrepresentation is material.  Information is considered material if it significantly alters the total mix of information made available.  By contrast, the Court requires that a plaintiff asserting a post-closing disclosure claim for damages against directors allege both (i) a material omission and (ii) that the nondisclosure resulted in a non-exculpated breach of fiduciary duty by the board.  In cases where an exculpatory clause in a corporation's charter shields directors from duty-of-care claims, a plaintiff must demonstrate a non-exculpated breach by showing either that a majority of the board was not disinterested or independent or that it was otherwise disloyal because it acted in bad faith in failing to make the disclosure.  A finding of bad faith requires an extreme set of facts under Delaware law indicating that directors either intentionally disregarded their duties or that the omission was so far outside the bounds of reasonable judgment that the only plausible explanation was bad faith.

2. Disclosure Claims Should Typically Be Brought Pre-Closing.  The Court indicated that under Delaware law the preferred method for resolving claims that a disclosure is either materially misleading or incomplete is during a pre-closing action to ensure a fully informed stockholder vote.  Disclosure claims pled but not pursued pre-closing may be viewed by the Court as waived. 

3. No Per Se Requirement That All Information Relied on By Financial Advisors Be Disclosed.  The Court reconfirmed that there is no requirement that all management inputs on which a financial advisor relies in its discounted cash flow valuation must be disclosed to stockholders.  Although the plaintiff had acknowledged that Delaware case law does not require banker-derived financial projections to be disclosed, it argued that it was entitled to the unlevered, after-tax cash flow projections prepared by management because (i) stockholders were being asked to exchange their ownership stake in the Company and forgo future cash flows in exchange for all-cash consideration and (ii) two of the financial advisor's disclosed cash flow projections relying on management's projections resulted in a share price of zero.  The Court found pre-closing that the omission likely was not material, and post-closing ruled that the claim failed even if the omission were deemed material because the plaintiff had not shown the disloyalty or bad faith required to sustain a non-exculpated breach of fiduciary duty claim. 

4. Disclosing That a Substantial Portion of a Financial Advisor's Fee is Contingent is Sufficient.  The Court reaffirmed that disclosure that a substantial portion of a financial advisor's fee was contingent will not sustain a violation absent a showing that the fee was exorbitant, unusual or otherwise improper.  In distinguishing a recent case finding that the level of contingency of a financial advisor's fee can be material, it noted that a showing that nearly all (in that case, 98 percent) of the  fee was contingent would exceed the common understanding of what constitutes a substantial portion of a fee and therefore raise questions about the advisor's objectivity and self-interest.

For a full copy of the opinion, click here.

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