Appel v. Berkman, No. 316, 2017 (Del. Feb. 20, 2018) (Strine, C.J.)

In this decision, the Delaware Supreme Court reversed the Court of Chancery’s dismissal of a stockholder challenge to a merger, which was based on a claim that material information was excluded from a Schedule 14D-9 Solicitation/Recommendation Statement (the “14D-9”). Specifically, the Supreme Court held that the reasons the company’s founder and Chairman had abstained from the board vote on the transaction were material, and the exclusion of those reasons from the 14D-9 rendered the disclosure insufficient.

In 2016, the Board of Directors (the “Board”) of Diamond Resorts International (“Diamond” or the “Company”) voted in favor of the Company’s sale to Apollo Global Management, which was structured as a tender offer followed by a second-step merger pursuant to Section 251(h) of the General Corporation Law of the State of Delaware. The Board vote was unanimous, except for the abstention of Stephen Cloobeck (“Cloobeck”), who was the Company’s founder, Chairman, and former CEO. At two meetings of the Board, Cloobeck had expressed concerns that mismanagement of the Company had depressed the sale price and that it was not the right time to sell the Company. While the 14D-9 disclosed the fact that Cloobeck had abstained, it did not disclose the reasons behind that abstention.

After the merger closed, the plaintiff stockholders commenced an action and, among other things, claimed that the Board had failed to disclose all material information regarding the transaction because the 14D-9 omitted the reasons for Cloobeck’s abstention. The Court of Chancery rejected the plaintiff stockholders’ argument and held that the reasons behind Cloobeck’s abstention were not material, and that the stockholders’ acceptance of the tender offer was fully informed. The plaintiffs appealed that decision to the Delaware Supreme Court.

The Supreme Court noted that Delaware law requires disclosures to stockholders to contain all material information. The Court further noted that once a board has undertaken to disclose a particular subject it must do so in a balanced way so as not to leave the stockholders with a distorted impression.

Here, the Court found that Cloobeck’s role as founder, past-CEO, and Chairman of the Company made his views uniquely important, especially in the context of a transaction that would cash out the Company’s stockholders. Specifically, the Court found that Cloobeck’s views would have caught a reasonable stockholder’s attention among the “acres and acres” of subjective reasons supporting the transaction. Without such information, the Court found that the stockholders were left guessing as to Cloobeck’s motives.

The Court also noted that Cloobeck’s views were particularly relevant in the context of a 14D-9 in which the directors were providing their recommendation to the stockholders. Such a discussion was unbalanced in omitting Cloobeck’s disagreement with that recommendation, particularly when a Chairman’s abstention “from voting on the sale of the business he founded and led is no common thing . . .”

In so holding, the Court stressed that it was not adopting a per se rule that the reasons for a director’s dissent or abstention will always or never be material. Rather, the Court stated that disclosures will continue to be reviewed on a case-by-case basis, with the Court determining whether such information would “materially affect the mix of information” within the context in which the case arises.

In light of these findings, the Supreme Court reversed the dismissal of the Court of Chancery and remanded the case for further consideration.

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