Opinion ID: 2370284
Heading Depth: 2
Heading Rank: 2

Heading: The Court of Chancery Erroneously Dismissed Count II of the Complaint

Text: In granting defendants' motion to dismiss Count II, the Court of Chancery ruled that the defendants' allegedly misleading disclosures and non-disclosures relating to the Sales Process and Reclassification were immaterial, because they did not alter the total mix of information available to shareholders. [39] Plaintiffs appeal only from certain of those materiality rulings. With respect to the Sales Process, the plaintiffs claim that the complaint adequately alleges that the defendants failed to disclose: (i) the circumstances of Cortland's withdrawal and (ii) insufficient deliberations by the Board before deciding to reject the First Place bid. [40] With respect to the Reclassification, plaintiffs claim that the complaint adequately alleges that (iii) the defendants were motivated by a desire to increase their ability to effect stock buy-backs and increase the liquidity of participants in the Employee Stock Ownership Plan (ESOP). [41] By holding otherwise, plaintiffs contend, the Court of Chancery reversibly erred. We conclude that the Proxy disclosures concerning the Board's deliberations about the First Place bid were materially misleading. Because we reverse the dismissal of Count II on that basis, we do not reach the plaintiffs' remaining disclosure claims.
It is well-settled law that directors of Delaware corporations [have] a fiduciary duty to disclose fully and fairly all material information within the board's control when it seeks shareholder action. [42] That duty attaches to proxy statements and any other disclosures in contemplation of stockholder action. [43] The essential inquiry here is whether the alleged omission or misrepresentation is material. The burden of establishing materiality rests with the plaintiff, who must demonstrate 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. [44]
In the Reclassification Proxy, the Board disclosed that [a]fter careful deliberations, the board determined in its business judgment that the [First Place merger] proposal was not in the best interest of the Company or our shareholders and rejected the [merger] proposal. Although boards are not required to disclose all available information[,] ... [45] once [they] travel[] down the road of partial disclosure of ... [prior bids] us[ing] ... vague language ..., they ha[ve] an obligation to provide the stockholders with an accurate, full, and fair characterization of those historic events. [46] By stating that they careful[ly] deliberat[ed], the Board was representing to the shareholders that it had considered the Sales Process on its objective merits and had determined that the Reclassification would better serve the Company than a merger. The Court of Chancery found, however, that the Board's Reclassification Proxy disclosure of careful deliberations about terminating the Sales Process was immaterial, because it would not alter the total mix of information to omit[] that phrase in its entirety. [47] We disagree and conclude that that disclosure was materially misleading. The Reclassification Proxy specifically represented that the First Niles officers and directors ha[d] a conflict of interest with respect to the [Reclassification] because he or she is in a position to structure it in a way that benefits his or her interests differently from the interests of unaffiliated shareholders. Given the defendant fiduciaries' admitted conflict of interest, a reasonable shareholder would likely find significantindeed, reassuringa representation by a conflicted Board that the Reclassification was superior to a potential merger which, after careful deliberations, the Board had carefully considered and rejected. In such circumstances, it cannot be concluded as a matter of law, that disclosing that there was little or no deliberation would not alter the total mix of information provided to the shareholders. The Vice Chancellor's finding that the challenged phrase could have been omitted in its entirety has the same infirmity. Had the careful deliberations representation never been made, the shareholders might well have evaluated the Reclassification more skeptically, and perhaps even less favorably on its merits, for two reasons. First, the shareholders would have had no information about the Reclassification's desirability vis-à-vis other alternatives. Second, they were told that the Board and Management had a conflict of interest in the one transaction that their fiduciaries had determined to endorse. We are mindful of the case law holding that a corporate board is not obligated to disclose in a proxy statement the details of merger negotiations that have gone south, since such information would be [n]either viably practical [n]or material to shareholders in the meaningful way intended by ... case law. [48] Even so, a board cannot properly claim in a proxy statement that it had carefully deliberated and decided that its preferred transaction better served the corporation than the alternative, if in fact the Board rejected the alternative transaction without serious consideration. The complaint's allegation that at its March 9, 2005 meeting the Board voted to reject a merger with First Place without any discussion, supports a reasonable inference that the Board did not carefully deliberate on the merits of that transaction. The defendants respond with a factual argument: even if the Board did not discuss the First Place offer at the March 9 meeting, it does not follow that the Board acted without sufficient deliberation. The reason, defendants say, is that the directors had received information relating to that offer, and the Sales Process had been discussed at other meetings. The difficulty with this argument is that it is based on facts outside the record that the court may properly consider on a motion to dismiss. That is, the defendants' argument requires considering facts not before the court, which on a motion to dismiss is inappropriate. On this basis, the dismissal of Count II must be reversed. We therefore do not address or decide the remaining claimed disclosure violations.