Opinion ID: 1535019
Heading Depth: 1
Heading Rank: 4

Heading: The Disclosure Claims

Text: The plaintiffs next argue that September 18, 1997 Consent Solicitation Statement for the Knightsbridge merger contained material omissions and misrepresentations. In particular, the amended complaint alleges that the board (1) falsely asserted that it orally informed Veritas of a September 4, 1997 deadline for its final offer, (2) failed to disclose the reason for the resignation of two directors just before the board approved the initial Knightsbridge offer in June 1997, and (3) failed to disclose that the board did not negotiate with Veritas concerning terms of the proposed dilutive option. The Court of Chancery concluded that the alleged misstatements and omissions were immaterial as a matter of law. [30] We begin by observing that the board's fiduciary duty of disclosure, like the board's duties under Revlon and its progeny, is not an independent duties but the application in a specific context of the board's fiduciary duties of care, good faith, and loyalty. [31] Where the board issues a Consent Solicitation Statement in contemplation of stockholder action, the board is obligated to disclose fully and fairly all material information within the board's control. [32] In Arnold v. Society for Savings Bancorp, Inc ., this Court adopted the following definition of materiality: [T]here must be a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the `total mix' of information made available. [33] Although materiality determinations under this standard are necessarily fact-intensive and do not generally lend themselves to dismissal on the pleadings, [34] some statements or omissions may be immaterial as a matter of law. [35] To survive a motion to dismiss, the plaintiffs must provide some basis for a court to infer that the alleged violations were material. For example, a pleader must allege that facts are missing from the statement, identify those facts, state why they meet the materiality standard and how the omission caused injury. [36] In the present case, the amended complaint alleges that the board falsely asserted in the Consent Solicitation Statement that Veritas had been orally informed of the September 4, 1997 deadline for its best, final offer. The amended complaint also alleges that Veritas' failure to comply with this requirement was among the reasons presented in the Consent Solicitation Statement for the board's decision to reject the Veritas offer. The plaintiffs maintain that this alleged misrepresentation is material because a stockholder's decision to ratify or reject a board decision is based, at least in part, on the board's stated rationale for its recommendation. The plaintiffs thus argue that a Frederick's stockholder would be more likely to ratify the board's decision to reject the Veritas bid if the board's decision was based on a good reason  that is, because the bid came too late. [37] The Court of Chancery found that this alleged misstatement was immaterial as a matter of law because the Consent Solicitation disclosed Veritas' later $9.00 offer. [38] Since the stockholders were aware of the higher bid, the Court of Chancery concluded that the timeliness of the offer was irrelevant. We agree with the Court of Chancery that the board's disclosure of the $9.00 bid renders immaterial as a matter of law any misstatement about the rationale of the Frederick's board for rejecting the bid. The importance that a stockholder ascribes to the availability of a higher bid in deciding whether to vote for or against a proposed merger is independent of the timeliness of the higher bid. Whether the bid was submitted on time or late would not significantly alter the stockholder's assessment of the attractiveness of the offer. [39] Accordingly, we conclude that the board's misstatement could not have been material to the reasonable stockholder. The amended complaint also alleges that the Consent Solicitation Statement failed to disclose the reasons for the resignation of two directors in June 1997, although that pleading does acknowledge that the fact of these resignations was disclosed. The allegation that two directors resigned from the board immediately before the board approved the Knightsbridge merger tends to support, for notice pleading purposes, a reasonable inference that the directors resigned as a result of a disagreement over corporate policy. Moreover, the resignation of board members and other key advisors based on a disagreement about corporate policy may, in some circumstances, be material information that must be disclosed to stockholders. [40] But the amended complaint does not allege  or present facts supporting an inference  that the board was aware of the reasons for the directors' resignations. [41] Absent some indication that the directors informed the board of their reasons for leaving, the board did not have a duty to disclose its assumptions about why the directors resigned. We also note that the two directors resigned before the board approved the June 15, 1997 merger agreement with Knightsbridge  well before the Frederick's stockholders were asked to approve the September 1997 merger agreement. It thus requires a significant logical leap to suppose that reasonable stockholders would consider this information significant in the total mix of information available to them in September 1997. Finally, the amended complaint alleges that the Consent Solicitation Statement did not disclose the fact that Veritas was prepared to negotiate the terms of the dilutive option that it had requested to circumvent Knightsbridge's voting power. Since the Consent Solicitation Statement indicated that the board relied on Veritas' request for a dilutive option in rejecting the bid, the plaintiffs argue, the board was obligated to disclose that the terms of the option were negotiable. This argument is based on a misreading of the Consent Solicitation Statement. The Statement indicates that the board declined to pursue the $9.00 bid in part because of the Board's continuing concern regarding the legality and practicality of issuing a dilutive option to [Veritas]. Thus, the board rejected the Veritas offer because the board was concerned about the legal validity of a dilutive option  regardless of the option's terms  and not because the terms of the option were non-negotiable. [42] We therefore agree with conclusion of the Court of Chancery that the negotiability of the option terms was not relevant to the board's asserted concerns with the Veritas bid and would not be material to assessing the board's rationale for rejecting the bid.