Opinion ID: 2346742
Heading Depth: 1
Heading Rank: 3

Heading: decision of the court of chancery following trial on the merits

Text: This case is quite unusual, perhaps unique. Plaintiff's claims at trial were based entirely on common law fraud. [4] There is no fraud on the market claim. [5] The only defendant is the corporate entity, Teledyne, so there are no fiduciary duty claims. The elements of a common law fraud (or deceit) cause of action consist of: 1) a false representation, usually one of fact, made by the defendant; 2) the defendant's knowledge or belief that the representation was false, or was made with reckless indifference to the truth; 3) an intent to induce the plaintiff to act or to refrain from acting; 4) the plaintiff's action or inaction taken in justifiable reliance upon the representation; and 5) damage to the plaintiff as a result of such reliance. Stephenson v. Capano Development, Inc., Del.Supr., 462 A.2d 1069, 1074 (1983). As the trial court recognized, fraud does not consist merely of overt misrepresentations, but may also occur through deliberate concealment of material facts, or by silence in the face of a duty to speak. Gaffin, Del.Ch., C.A. No. 5786-NC, slip op. at 16, Hartnett, V.C., 1990 WL 195914 (Dec. 4, 1990) (quoting Stephenson, Del.Supr., 462 A.2d at 1074 (citations omitted). [T]here is no requirement that the defendant have known or believed its statement to be false or to have made the statement in reckless disregard of the truth. Rather, equity provides a remedy for negligent or innocent misrepresentations. Id. In the context of a class action, however, establishing the fourth element of the equitable fraud cause of action  that plaintiff acted in justifiable reliance on the misrepresentation  is particularly problematic. In order to satisfy this element in the present case, the trial court ruled that a rebuttable presumption of class-wide shareholder reliance was established by the facts that: a) each class member received the offering circular which failed to contain material financial information; and b) each shareholder tendered shares by signing off on the offering circular's Letter of Transmittal. Id. at 42. Plaintiff's primary contention at trial was that Teledyne made false, misleading or incomplete disclosures in its February 1976 offering circular, and that it withheld its 1975 Annual Report so that it could not be timely considered by its shareholders who were considering the repurchase offer. Id. at 15. Teledyne defended on the basis that all relevant financial information concerning Teledyne's recent significant increase in earnings was already present in the total mix of information available to all shareholders via prior press releases and public filings. Therefore, Teledyne contended that it should not be held liable for failing to repeat this information in the offering circular. Moreover, even if its total mix defense failed, Teledyne contended that its disclosure violations were cured by the subsequent release of its 1975 Annual Report nine days before the close of Teledyne's self tender offer. Id. at 35. The trial court ultimately rejected Teledyne's total mix and cure defenses, and ruled that Teledyne had failed to rebut the presumption of class-wide reliance. The trial court found that Teledyne had failed to show that substantially all of its shareholders received the 1975 Annual Report before the close of the Offer, or that those shareholders who received the [Annual Report] had adequate time to consider the information in order to make an informed decision to tender or not. Id. at 31. The court also found that Teledyne had failed to show that the most recent financial information had been made directly available to the other shareholders or that the information disclosed in the press releases and public filings was the type of information of which [the other] shareholders are `presumably aware.' Id. at 32-33 (citations omitted). As a result, the Court of Chancery concluded that Teledyne was guilty of equitable fraud in that its February 1976 Tender Offering Circular did not adequately disclose to its stockholders all the material facts a stockholder reasonably needed to make a fully informed decision whether or not to tender. Id. at 2. This ruling was based on the court's conclusion that Teledyne had made the following material misdisclosures or omissions in connection with the tender offer: (1) Teledyne failed to disclose in the offering circular that the purpose of its repurchase offer was to make a sound investment. The court determined that this omission was material because there is a substantial likelihood that disclosure of the purpose would have been viewed by a reasonable shareholder as significantly altering the total mix of information available. Id. at 26. (2) The offering circular was slightly misleading when it stated that the repurchase offer was not open to Teledyne's officers and directors when, in fact, the offer was technically open to Teledyne's two most senior officers albeit in their capacity as trustees in charge of Teledyne's pension plan trust which held and ultimately tendered 1.1 million shares. The court determined that this misdisclosure was material because the undisclosed control of these shares arguably gave Teledyne the power to cause a proration of the number of shares accepted in the tender offer, a fact that would have assumed actual significance in the deliberations of a reasonable shareholder. Id. at 18-19. (3) Teledyne failed to include material financial information in the offering circular when it knew or should have known that the information in its 1975 Annual Report would not likely be received in sufficient time to aid stockholders in considering the Tender Offer. Id. at 31. Notwithstanding these material disclosure failures, the court further concluded that: (a) the disclosure omissions were of only marginal significance; [6] (b) plaintiffs had failed to show with certainty the amount of damage to each member of the class or ... that any significant number of tendering stockholders would not have tendered if they had received the [desired] information before the closing of the Tender Offer (i.e., lack of proximate causation); and (c) rescissionary damages were inappropriate. Id. at 47-49. In an attempt to fashion an appropriate remedy, the trial court recognized that there is precedent for awarding monetary damages to a shareholder class where the shareholders suffered an injury because they were deprived of their right to make an informed decision regarding a corporate transaction, even without a showing of rescissionary or compensatory damages with certainty. Id. at 50 (citing Weinberger v. UOP, Inc., Del.Ch., C.A. No. 5642-NC, Brown, C., 1985 WL 11546 (Jan. 30, 1985), aff'd, Del.Supr., 497 A.2d 792 (1985) (Order)). The court ultimately determined that an award of damages to the class in the amount of $1 per share was appropriate. The court expressly excluded that portion of the class which consisted of arbitragers on the basis that the evidence showed that the arbitragers were not interested in any of the disclosures or omissions at issue in this litigation, and that such information would not have affected their decisions to tender. Id. at 50-51. In a revised order dated November 7, 1991, the court further ruled that the recovery of each class member shall be with interest at 12 percent from December 4, 1990.