Opinion ID: 2165124
Heading Depth: 1
Heading Rank: 5

Heading: disclosure issues in this case

Text: The Court of Chancery decided that the contingent FAC bid of $275 million was immaterial as a matter of law under all the circumstances because the sale of FAC was an event that could occur only under certain circumstances (e.g., with regulatory approval, and/or concurrent with the sale of Bancorp). Opinion at 13-14. Plaintiff challenges this holding on two independent grounds: (i) that the FAC bid was material as a matter of law and had to be disclosed in all events; and (ii) that in view of the partial disclosures in the proxy statement the FAC bid became material and the failure to disclose it was misleading. The Vice Chancellor decided this case on the first ground, but failed to address the second ground. In our view, however, the case turns on the partial disclosure issue. We hold that the partial disclosures in the proxy statement were misleading in their description of the background information, and that the misleading partial disclosures made the FAC bid material under all the circumstances. Assuming hypothetically that there had been no partial disclosures as set forth and discussed below, the FAC bid may or may not have been material. We need not address that issue because of our holding that the FAC bid was material in view of the partial disclosures. Therefore, we reverse on that ground alone. We turn now to the partial disclosure-materiality issue. In the instant case, the proxy statement at page 21 reads, in pertinent part: Background of and Reasons for the Affiliation; Recommendation of the Bancorp Board of Directors Background. In April of 1991, Bancorp engaged the investment banking firm of Goldman Sachs to aid it in evaluating various possible financial or strategic alternatives intended to maximize stockholder value, which engagement was publicly announced on April 30, 1991. At the time of Goldman Sachs' engagement, the Bancorp Board recognized that the strategic alternatives to be considered might include, but not be limited to, the sale of Bancorp or the sale of Society. During the spring of 1991, Society was in the midst of an examination being conducted by the FDIC and was experiencing asset deterioration. It was also a time when there had been, and continued to be, consolidation in the United States banking and financial services industry. During the late spring and the summer of 1991, the management of Bancorp, with the assistance of Goldman Sachs, analyzed transactions involving the sale of Bancorp as a whole or the sale of Society or FAC. During the summer and early fall of 1991, management and Goldman Sachs also studied the possibility of a transaction structured as a deposit assumption by a bank or thrift and an asset sale to one or more third parties. During the summer of 1991, Goldman Sachs, on behalf of Bancorp, solicited indications of interest to acquire Bancorp or Society. By the fall of 1991, these efforts had produced no attractive opportunities for the sale of Bancorp or the sale of Society, at which point there began a more intensive evaluation of a three-part strategy in which Society's loan and investment assets, its ownership interest in FAC and its retail branch bank system would be sold in separate transactions. After Bancorp's management and Goldman Sachs had investigated such transactions for several months, which investigation included contacting certain entities previously contacted as well as other parties and evaluating certain potential indications of interest, the Bancorp Board of Directors, at a meeting held on May 28, 1992, considered whether to pursue a series of transactions in which (a) FAC would be sold to a third party, (b) substantially all of Society's assets would be sold to an affiliate of Goldman Sachs, (c) the remainder of Society's assets (other than cash and its branches) would be placed in a stub bank or similar entity and distributed to Bancorp's stockholders and (d) Bancorp (which would then consist of Society's deposits and certain other liabilities, its branches and the cash received from the sale of FAC and the sale of assets) would be merged with a subsidiary of Bank of Boston. In such merger, the holders of Bancorp Common Stock would have received shares of Bank of Boston Common Stock. The transactions discussed at the May 28, 1992 Bancorp Board meeting were tentative and the Board was advised that, in light of uncertainties involving the value of certain assets, the value ultimately distributable to stockholders could only be estimated. The Bancorp Board was also informed that a number of steps would have to be completed before the transactions could proceed. These steps included the completion of the sale of FAC in an auction process, the completion by the Goldman Sachs affiliate of its due diligence on Society's assets and the negotiation and execution of definitive agreements with all interested parties. In light of a number of factors, including (a) the lack of certainty of the value to be received in the sale of FAC and Society's assets and consequently the value to be received by Bancorp's stockholders, (b) the substantial costs of proceeding to the stage where more certain values would be ascertainable, (c) the significant risks of failure to close associated with three separate transactions all conditioned upon each other, and the substantial expenses and costs to be incurred in the event of a failure to close and (d) recent improvements in Society's condition and results and Bancorp's prospects, the Board of Directors of Bancorp determined at the conclusion of the May 28, 1992 meeting that it was in the best interests of Bancorp not to pursue the proposed transactions further and to terminate Goldman Sachs' efforts in connection with exploring strategic alternatives. (Emphasis added). Plaintiff's partial disclosure arguments stem from the portions of the proxy statement highlighted above.
Materiality requires a careful balancing of the potential benefits of disclosure against the possibility of resultant harm. Even assuming that there was no material issue of fact that the FAC bid was contingent on the sale of other parts of Bancorp, and that regulatory approval for a stand-alone sale of FAC pursuant to the May proposal would not have been forthcoming, [14] the disclosures in the proxy statement were incomplete and therefore misleading under all the circumstances. One must parse the proxy statement disclosures in light of the essential facts regarding the FAC bid to determine if the disclosures which were made were adequate or incomplete. Set forth below is a parsing of the proxy statement juxtaposed with the findings of the Vice Chancellor concerning the contingent FAC bids. [15] According to the proxy statement: (1) In 1991 Goldman, on behalf of Bancorp, solicited indications of interest to acquire Bancorp or Society. (2) By the fall of that year these efforts had produced no attractive opportunities for the sale of Bancorp or the sale of Society. (3) At that point there began a more intensive evaluation of a three-part strategy in which Society's loan and investment assets, its ownership interest in FAC and its retail branch bank system would be sold in separate transactions. (4) Bancorp and Goldman investigated such transactions for several months. (5) This investigation included contacting certain entities ... and evaluating certain potential indications of interest. [The Vice Chancellor found, with regard to this investigation and these potential indications of interest, that: [S]everal companies submitted bids for FAC, one of which was valued at approximately $275 million. The bids were indeed submitted and were genuine offers to purchase FAC. However, these circumstances do not mean that FAC could be or was intended to be sold, in a stand-alone transaction, to the highest bidder. On the contrary... the FAC bids were solicited as one part of the proposed Goldman transaction... [I]f any part of [the May Proposal] was contingent or speculative in any way, the sale of FAC must have been contingent, too ... [T]he sale of FAC was not an event that could occur under any scenario ... the sale of FAC ... could occur only under certain circumstances ( e.g., with regulatory approval, and/or concurrent with the sale of Bancorp). Opinion at 13-14.] (6) Thereafter the Bancorp board met on May 28, 1992, and considered whether to pursue a series of transactions in which (a) FAC would be sold to a third party, (b) substantially all of Society's assets would be sold to ... Goldman ... (c) [the stub assets would be] distributed to Bancorp's stockholders and (d) Bancorp ... would be merged with a subsidiary of Bank of Boston. (7) The transactions discussed at this meeting were tentative and the board was advised that, in light of uncertainties involving the value of certain assets, the value ultimately distributable to stockholders could only be estimated. (8) The board was also informed at the May 28, 1992 meeting that a number of steps would have to be completed before the transactions could proceed. [The Vice Chancellor further found that as contemplated by Goldman Sachs, the solicitor of the FAC bids, the sale of FAC was but one component in a complicated transaction. Opinion at 14.] (9) These steps included the completion of the sale of FAC in an auction process. [In an earlier part of the Opinion the Vice Chancellor had found: In order to quantify its strategy, Goldman Sachs sought to value the FAC component of the Proposed Transaction. It accomplished this by conducting an auction of FAC. Nine companies submitted serious preliminary bids for FAC; Norwest submitted a high bid of $275 million. Goldman Sachs invited the five highest bidders to conduct due diligence of FAC, and after Norwest's completion of due diligence, it confirmed its offer to buy FAC for $275 million. In May 1992, contracts for the sale of FAC were drafted; the only steps remaining were for Bancorp and its shareholders to approve the Proposed Goldman Transaction and the parties to the sale to sign the agreements. Opinion at 2.] (10) In light of a number of factors, including (a) the lack of certainty of the value to be received in the sale of FAC and Society's assets and consequently the value to be received by Bancorp's stockholders and costs, risks of failure to close and recent improvements in Society's condition and Bancorp's prospects, the board determined not to pursue the proposed transactions further. [The Vice Chancellor further found: [T]he bids submitted for FAC were highly speculative and contingent. As a result, they in no way established a value of Bancorp.... [T]hey were bids for FAC, not Bancorp. No reasonable shareholder could extrapolate the value of a parent company from the value of one of its subsidiaries. The shareholder would have no way of knowing if other subsidiaries ... had a negative value and the extent of the negative value, if any. Opinion at 15.] The problem with the Vice Chancellor's conclusion that the FAC bid was not material is that the partial and elliptical disclosures in the proxy materials were misleading without a disclosure of the $275 million bid and an explanation of its contingent nature. The Vice Chancellor's own findings reveal the incompleteness of the disclosures in the proxy statement and how the contingent FAC bids could have been described without inundating the stockholders with information and without an overemphasis of the FAC bids. Opinion at 14. We hold only that, once defendants traveled down the road of partial disclosure of the history leading up to the Merger and used the vague language described, they had an obligation to provide the stockholders with an accurate, full, and fair characterization of those historic events. Cf. Lynch, 383 A.2d at 281 (holding that defendants violated their disclosure obligations when they partially disclosed a reliable, floor asset valuation but did not disclose an equally reliable ceiling value). [16] We agree with the Vice Chancellor that, as an abstraction, Delaware law does not require disclosure of inherently unreliable or speculative information which would tend to confuse stockholders or inundate them with an overload of information. This principle is consistent with Bershad v. Curtiss-Wright Corp., Del.Supr., 535 A.2d 840, 847 (1987) (Efforts by public corporations to arrange mergers are immaterial under the Rosenblatt v. Getty standard, as a matter of law, until the firms have agreed on the price and structure and the transaction.). [17] But, under the circumstances of this case  which involve a partial and incomplete disclosure of historical information  we disagree with the Vice Chancellor's holding that the existence of the $275 million bid for FAC was not material. [18] To be sure, the bid for FAC was contingent since it was only one part of an interdependent series of transactions and apparently required regulatory approval. [19] It does not follow from this fact, however, that a reasonable stockholder, having been partially informed of the history in the language of the proxy statement, would not have found it significant that one subsidiary of Bancorp had been the subject of a genuine auction bid of $275 million under contingent and explainable circumstances when the Merger transaction itself was valued at $200 million, some 37 percent less than Norwest's contingent bid for FAC. We find that there is a substantial likelihood that the disclosure of this information would have significantly altered the total mix of information in the view of a reasonable stockholder. The voting choice of a stockholder included the decision of whether it was better to remain a stockholder in a continuing Bancorp with FAC as an asset (though there are other components with negative value and it may not be viable to sell FAC alone) or to be transformed into a stockholder in a new entity with Bancorp's asset/liability mix plus other assets and liabilities combined as part of the surviving entity. [20] Without this information, the reasonable stockholder could infer from language in the proxy statement that there only was an evaluation, an investigation, certain potential indications of interest, and that there were no genuine bids for actual dollar amounts in an auction. Thus, the Court of Chancery erred as to the partial disclosure claim, in granting defendants' motion for summary judgment, and denying plaintiff's cross-motion for partial summary judgment. [21] We have concluded that the partial disclosure issue should be decided on the summary judgment record. For purposes of our decision, predicated as it is on the partial disclosure ground, the record is complete and this Court is in as good a position as the Court of Chancery to decide this mixed question of law and fact. We decide only the case before us. See QVC, 637 A.2d at 51. Therefore, it is important to understand what we are not deciding. First, we are not deciding that the FAC bid was material as a matter of law. Second, since we have predicated our decision narrowly on the partial disclosure ground and assumed the facts in the light most favorable to the defendants on the regulatory approval question, [22] the material issue of fact analysis on that question is moot.
Plaintiff argues that Goldman's valuation of Bancorp at $19.26 per share in the Executive Summary of the May Proposal was material in light of the value of those shares under the Merger  $17.30 as of August 28, 1992. [23] Defendants counter that Goldman never fixed Bancorp's share value at $19.26 because the May Proposal explicitly, inextricably bound that figure to a number of speculative contingencies, such as the uncertain value of the stub. The Court of Chancery held that exclusion of the $19.26 figure was proper because it was not material. We agree. Goldman's share valuation was too unreliable to be material. A board of directors must balance potential benefit versus harm when deciding whether or not to disclose an investment advisor's earnings per share valuation. In re Vitalink Communications Corp. Shareholders' Litig., Del.Ch., C.A. No. 12085, slip op. at 28, Chandler, V.C., 1991 WL 238816 (Nov. 8, 1991) reprinted in 17 DEL.J.CORP.L. 1311, 1335 (1992). In opining that an offer is fair, where an investment advisor promulgates a best case projection predicated on an interplay of several, uncertain variables, the forecasted value need not be disclosed because it is too speculative and thus immaterial. Weinberger v. Rio Grande Indus., Del.Ch., 519 A.2d 116, 129-30 (1986) (earnings projection immaterial even though it depicted outlook more optimistic than that underlying the offer). Disclosing an overly optimistic per share figure may be harmful because it might induce stockholders to hold out for an elusive, higher bid. This risk cannot be reduced significantly by attempting to qualify the figure. Vitalink, slip op. at 29, 17 DEL.J.CORP.L. at 1335-36. In fact, disclosure of an unreliable share valuation can, under some circumstances, constitute material misrepresentation. Smith v. Van Gorkom, Del.Supr., 488 A.2d 858, 891 (1985). In the instant case, plaintiff argues that the $19.26 figure found in the Estimated Values section of the Executive Summary, which Goldman used to describe the May Proposal to the board, was fixed. The record refutes plaintiff's claim. First, footnote (c) in the Estimated Values section qualifies the Stub Security value. It states that the stub requires some cash to satisfy indemnity. Amount of cash is subject to negotiations with various buyers. Second, in the section in the Executive Summary titled Issues to Consider Regarding Valuation Changes, two concerns are indicative of the uncertainty attached to the $19.26 valuation: (i) if there is a [m]aterial deterioration of loan portfolio's credit quality, existence of environmental issues, [or] inability to obtain clear title, there would be no positive effect and the following negative effect  Assets will be transferred to stub reducing cash value to stockholders. Deterioration may impair deal economics; and (ii) if the [l]oan does not meet secondary market documentation standards, there again would be no positive effect and the following negative effect  Legal restrictions in loan documents or servicing agreements may prohibit sale or transfer of loans. Failure to meet standards will increase assets in the stub entity, reducing cash value to shareholders. Additionally, defendants submitted several affidavits and deposition testimony confirming the unreliability of the stub's estimated value, which in turn made the $19.26 figure unreliable. Connell in his affidavit stated in relevant part: [T]here was a fourth element to the May Proposal. Society had and still has substantial assets which are essentially unsalable, generally comprised of foreclosed commercial real estate which, in many cases, have a negative value due to environmental or other problems.... The necessity for this stub entity created further complexity and made it difficult, if not impossible, to value accurately the entire transaction. Although Goldman indicated that the value of the stub might be as high as $3.32 per share ... Goldman made it clear to Board that that value was based on the book value of the stub assets, which is not reflective of the amount of their market or liquidation value. Stated differently, no buyer would purchase such assets at book value at that time. In pertinent part, Berlinski in his affidavit stated: The Board ... determined not to proceed further with [the May Proposal] since it viewed it as too speculative, complex and difficult to value.... [T]he values it would achieve were uncertain, in part due to the inability to assess the likely trading value of the stock in the stub entity that would hold the Bank's unsalable assets, such as its foreclosed real estate. We told the Board that the $3.32 per share value we attributed to the stub was simply its estimated book value and that stock in the stub was likely to trade for considerably less. In the relevant portion of Stone's affidavit, he stated: [W]hile I believed [in May 1992 that] it was worth at least pursuing the [May Proposal] further, I certainly did not believe, and to the best of my knowledge, no one else on the Board believed that that proposal  even if it could be successfully concluded  would be worth as much as $19.26. This was in part because the existence of the stub security (representing ownership of generally unsalable assets) made it difficult if not impossible to know what the actual value of the proposal would be and the need to set aside cash in the stub to indemnify purchasers of Society's assets created further uncertainty as to that value. Although Goldman indicated in its presentation to the Board that the stub could have a book value of $3.32 per share, Goldman made it clear to the Board both in its written presentation and orally that this value was speculative and by no means represented the value at which the stub security would trade in the market. In his deposition testimony, Chase stated: What Goldman has done in this executive summary ... is offer a projection ... which may or may not have materialized[.]... [The Executive Summary] does talk about the stub security as it describes $3.32 as a value [ sic ], and that was one that I just described prior to looking at this, that would have been like a $3.00 minus rather than $3.00 plus. Take $3.00 off the 15.94 which is the per share basic bid and [that] would have dropped the bottom line from $19.26 to like maybe $12 and change, and that's why I didn't like [the May Proposal] at all. [24] Defendants' submissions shifted the burden to plaintiff to counter their claim that the stub had some value less than the estimated $3.32 per share. See Ch.Civ.R. 56(e); Irwin & Leighton, Inc. v. W.M. Anderson, Del.Ch., 532 A.2d 983, 986 (1987); Tanzer v. International Gen. Indus., Del.Ch., 402 A.2d 382, 385 (1979). Rather than make any such offer of proof, plaintiff elected to argue in the alternative without ever having made an affirmative case that the $3.32 figure reflected a realizable value. [25] Accordingly, plaintiff failed to meet his counter-burden. See Ch. Civ.R. 56(e); Irwin & Leighton, 532 A.2d at 986; Tanzer, 402 A.2d at 385. [26] Unlike the elliptical disclosure of facts surrounding Norwest's $275 million bid for FAC, discussed supra, defendants made a simple, accurate disclosure in the proxy statement relating to the value of Bancorp shares under the May Proposal: [T]he Board was advised that, in light of uncertainties involving the value of negative assets, the value ultimately distributable to stockholders could only be estimated. Given that the finding of the Court of Chancery as to the unreliability of the $19.26 figure is supported by the record, the statement above was neither misleading nor incomplete. Thus, the trial court did not err in holding the $19.26 estimate immaterial as a matter of law. E.g., Vitalink, slip op. at 28-29, 17 DEL.J.CORP.L. at 1335-36; Rio Grande, 519 A.2d at 129-30.
Plaintiff raises four misrepresentation arguments relating to the disclosure of merger negotiations in the proxy statement: that the statement (i) disclosed that the board had negotiated the Merger when in fact Connell negotiated the Merger during the summer of 1992 without board approval, himself arriving at the $20 figure for the share cap; (ii) should have disclosed more emphatically Weinerman's and the Chairman's abstentions; (iii) should not have described the final Merger vote as unanimous when in fact the vote purportedly was eight in favor, one in opposition, and five abstaining (8-1-5); and (iv) should have been supplemented with disclosure of the board's post-approval renegotiation meetings with BoB. The Court of Chancery held that these purported facts were immaterial. We agree. Plaintiff's misrepresentation claims lack merit. His claim that Connell first suggested the $20 share cap figure, which was not the exchange value as of the date the board approved the Merger, does not satisfy the materiality test under the circumstances of this case. See Cede & Co. v. Technicolor, Inc., Del.Supr., 634 A.2d 345, 372 (1993) (affirming trial court's finding that there was no need to disclose a share value which a target director initially deemed acceptable, without consulting investment advisors, because non-disclosure [of such was] plainly not material). But cf. Smith v. Van Gorkom, Del.Supr., 488 A.2d 858, 890-92 (1985) (finding violation of disclosure obligations where proxy statement partially disclosed that target director first suggested final, agreed-upon merger share price but failed to describe accurately the motive behind focusing on that figure). Given that the proxy statement described Weinerman's and the Chairman's abstentions and their respective reasons therefor in great detail, [27] plaintiff's second argument is without merit. The third and fourth arguments simply mischaracterize the facts. With regard to the third argument, the 8-1-5 vote was an interim one which was disclosed; the final vote, which also was disclosed, was twelve in favor with two abstentions. Further, the description of the 12-0-2 vote  unanimous[] ... (with two directors abstaining)  was proper. See Weinberger v. UOP, Inc., Del.Ch., 426 A.2d 1333, 1353 (1981), rev'd on other grounds, Del.Supr., 457 A.2d 701 (1983). As to plaintiff's final argument, the board's discussion with BoB did not involve a renegotiation of the Merger. The primary purpose of the meeting was to ensure compliance with the terms and conditions of the original, approved Merger  more specifically, that the closing of the Merger be timely. Such subsequent, purely implemental meetings are immaterial under the circumstances of this case. See Bershad v. Curtiss-Wright Corp., Del.Supr., 535 A.2d 840, 847 (1987) (holding that there is no requirement under Rosenblatt of play-by-play disclosure of merger negotiations because such details would not alter the total mix of information provided stockholders and thus are immaterial). Thus, the Court of Chancery did not err in rejecting plaintiff's claims relating to the Merger negotiations.
Plaintiff argues that the proxy statement misled stockholders by disclosing that the board did not rely on Goldman's earnings projections, prepared in connection with the May Proposal, when in fact the board relied on such projections in evaluating the fairness of the Merger. In support, Plaintiff relies on a memorandum dated May 26, 1992, from Connell to the board (the Connell memo) regarding Project Elite (the May Proposal). The Court of Chancery rejected plaintiff's claim as factually unsupported. Plaintiff's claim is without merit. In relevant part, the proxy statement reads: (With respect to Bancorp's prospects, the Board of Directors took into account, among other things, management's base case projections (prepared in April, 1992 in conjunction with Bancorp's capital plan for regulatory purposes) (the base case) and certain alternative projections prepared by management under more favorable assumptions (the best case). The projected 1994 earnings per share (EPS) under the base case and best case were $1.79 and $2.75, respectively, which reflected numerous assumptions [listing assumptions]. It should be noted that many of the assumptions, including those referenced above, were outside the control of Bancorp, and neither Bancorp nor any other person or entity makes any representation as to their achievability [ sic ]; such projections have not been updated and Bancorp does not assume hereby any obligation to update them. Accordingly, neither Bancorp nor any other person or entity believes that Bancorp stockholders should rely on such projections.) (Emphasis added). The crux of plaintiff's argument is that the board (or at least management) relied on the best case projections in evaluating the fairness of the Merger. The Connell memo, however, does not rely on the best case scenario. Rather, it concludes that, because the risks associated with achieving the best case scenario outweigh the potential benefits, the board should reject the best case projection and instead pursue the May Proposal. [28] Nothing in the challenged, above-highlighted portion of the proxy statement was inaccurate or misleading. [29]