Opinion ID: 2266268
Heading Depth: 2
Heading Rank: 1

Heading: Disclosure of Patent Counsel's Advice

Text: Zirn argues that VLI's synopsis of patent counsel's advice was materially misleading absent further disclosure. Specifically, Zirn asserts that the discussion of patent counsel's advice contained in the 14D-9 was skewed in that it disclosed only a significant risk of the patent not being reinstated. The Court of Chancery rejected this claim, however, holding that disclosure of a significant risk logically implies the corresponding possibility of the risk not being realized. We disagree and hold that the 14D-9 was materially misleading absent further disclosure of patent counsel's views. Once VLI undertook to discuss the import of patent counsel's advice, it assumed a duty to discuss that advice fully and fairly. To discharge this duty, it was necessary to include in the 14D-9 a discussion of the correlative probability of successful patent reinstatement. It is well-established that the duty of disclosure represents nothing more than the well-recognized proposition that directors of Delaware corporations are under a fiduciary duty to disclose fully and fairly all material information within the board's control when it seeks shareholder action. Stroud v. Grace, Del.Supr., 606 A.2d 75, 84 (1992). This duty inheres any time a corporate board of directors seeks stockholder action. Id.; see also, Blasius Indus. v. Atlas Corp., Del. Ch., 564 A.2d 651, 659 n. 2 (1988) (citing Smith v. Van Gorkom, Del.Supr., 488 A.2d 858 (1985); In re Anderson Clayton Shareholders' Litig., Del.Ch., 519 A.2d 669, 675 (1986)). Our analysis therefore turns on whether or not the VLI Board disclosed all facts material to the decision faced by VLI's stockholders. The materiality standard is well understood: An omitted fact is material if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote.... It does not require proof of a substantial likelihood that disclosure of the omitted fact would have caused the reasonable investor to change his vote. What the standard does contemplate is a showing of a substantial likelihood that, under all the circumstances, the omitted fact would have assumed actual significance in the deliberations of the reasonable shareholder. Put another way, there 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. Rosenblatt v. Getty Oil Co., Del.Supr., 493 A.2d 929, 944 (1985) (quoting TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449, 96 S.Ct. 2126, 2132, 48 L.Ed.2d 757 (1976) and adopting TSC materiality standard as Delaware law). In addition to the traditional duty to disclose all facts material to the proffered transaction, directors are under a fiduciary obligation to avoid misleading partial disclosures. The law of partial disclosure is likewise clear: [O]nce defendants travel[] down the road of partial disclosure ... they ... [have] an obligation to provide the stockholders with an accurate, full, and fair characterization of those historic events. Arnold I, 650 A.2d at 1280; see also Lynch v. Vickers Energy Corp., Del.Supr., 383 A.2d 278, 281 (1977) (holding that defendants violated their disclosure obligations when they partially disclosed a reliable, floor asset valuation but did not disclose equally reliable ceiling values). The Defendants argue with some force, however, that no aspect of patent counsel's advice standing alone was required to be disclosed. [1] We need not decide in the abstract whether the general subject matter of patent counsel's advice was material. Under Arnold, the disclosure of even a non-material fact can, in some instances, trigger an obligation to disclose additional, otherwise nonmaterial facts in order to prevent the initial disclosure from materially misleading the stockholders. VLI's Schedule 14D-9 simply stated that [t]he Company ... has been advised by special patent counsel that there is a significant possibility of the reconsideration petition not prevailing in the Patent and Trademark Office. This is certainly not an untrue statement. But, standing alone, it paints an unduly bleak picture of VLI's chances for success in the PTO. Patent counsel appeared to believe that the prospects for reinstatement were quite good. In a November 3, 1987 letter from patent counsel to the VLI Board of Directors, patent counsel expressed the view that, [r]egarding the likely outcome of [patent counsel's] ... efforts [to reinstate the patent], it is my opinion, and the opinion of other members of my law firm, that we have an excellent case on the merits and there is a good chance that we will prevail in the PTO. (Emphasis supplied.) Patent counsel further stated that he was confident that the VLI patent could ultimately be reinstated by one mechanism or another. Thus, it is clear that VLI's partial disclosure failed to convey the totality of patent counsel's views and was thus materially misleading. VLI's stockholders were faced with a single decision: whether to tender their shares or retain them. In making this determination, one factor was particularly relevant, viz., whether the AHP offer of $6.25 per share represented an adequate price given the aggregate value and prospects of the company. If a stockholder viewed the company's offer as inadequate, those shares would likely not have been tendered. Those who chose to tender despite an inadequate price likely would have done so for extrinsic reasons ( e.g., personal financial needs, the likelihood of the company folding before an adequate offer came along or reluctance to pursue an appraisal remedy). Nevertheless, any misstatement contained in the 14D-9 which misled the stockholders concerning the value of the company would necessarily be material. In light of the partial disclosure, the undisclosed advice of patent counsel was extremely relevant to a reasonable stockholder's valuation of the corporation. The patent provided protection for VLI's most valuable asset, the Today© contraceptive sponge. The failure accurately to convey the prospects for reinstatement was misleading in a material way, because it gave an unduly pessimistic assessment of VLI's chances for success in the PTO. This fact had a direct bearing on the individual stockholder's ability to value the corporation accurately and, consequently, this fact was one that a reasonable investor would want to know. In light of the partial disclosure of patent counsel's opinion, a more balanced disclosure thereof would have significantly altered the total mix of information available to the individual VLI stockholder. TSC, 426 U.S. at 449, 96 S.Ct. at 2132; Rosenblatt, 493 A.2d at 944. The Court of Chancery rejected Zirn's claim of materiality, however, stating that the language of the Schedule 14D-9 was sufficiently tempered so as to avoid any misleading result. Essentially, the trial court held that the concept of a significant risk of failure implies a correlative probability of success. This analysis runs contrary to established precedent, however. For example, in Lynch v. Vickers Energy Corporation , this Court addressed a situation involving comparable facts. Lynch, 383 A.2d at 281. In Lynch, the Court held that disclosure of a floor value for the company's assets without the related disclosure of equally trustworthy ceiling estimates was materially misleading. In so holding, the Court reversed the determination of the Court of Chancery that qualifying language [2] in the tender offer materials was sufficient to avoid misleading the stockholders. VLI argues at length that the holding we now reach will be tantamount to a rejection of the materiality requirement in cases of partial disclosure. This argument is plainly untenable. The partial disclosure rule is implicated only where the omission of a related fact renders the partially disclosed information materially misleading. Thus, the materiality standard announced by the United States Supreme Court in TSC Industries v. Northway and adopted by this Court in Rosenblatt v. Getty Oil is still controlling in this context. The only distinction between this case and the traditional disclosure context is that, in the partial disclosure setting, the initial disclosure may sometimes be voluntary rather than mandatory. VLI further asserts that the holding we reach today will impose an undue burden on corporate fiduciaries and will force directors to disclose all historical information to which they have access. The result, it is argued, will be a deluge of information which will render it impossible for stockholders to determine what is and what is not significant. This is an equally untenable position. VLI, of its own accord, determined to provide stockholders with only a one-sided portion of patent counsel's advice. One curative statement could have obviated the need for this litigation. Our holding here, as in Arnold and Lynch, does not compel disclosure of all information, it simply requires disclosure of enough information to avoid misleading the stockholders. We also recognize, as the Court of Chancery did, that [t]he goal of disclosure ... is not to flood shareholders in a sea of related, but immaterial information that ripples endlessly away from the financial or governance core of the matter. [3] The goal of disclosure is, however, to provide a balanced and truthful account of those matters which are discussed in a corporation's disclosure materials.