Required Public Disclosure

The Deal’s David Marcus reviews the current state of Delaware law regarding the level of disclosure required by public companies in M&A transactions.

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Companies’ disclosure of information to shareholders is governed by federal law and overseen by the Securities and Exchange Commission, but when that disclosure regards the sale of a Delaware company, the state’s Court of Chancery often opines on the adequacy of the information shareholders receive as well. Most companies settle M&A-related shareholder litigation by agreeing to additional disclosure. Delaware judges must approve the settlements, and they have developed a robust and occasionally contradictory body of law on what companies must disclose about the process by which they agree to a sale.

Chancellor Leo E. Strine Jr. and Vice Chancellor Sam Glasscock III discussed the disclosure of work by a target’s investment banker in recent rulings. Both judges suggested that there’s a limit to the amount of information that shareholders need.

Strine issued a brief comment on Feb. 20 in rejecting a request for expedition of shareholder litigation arising from the proposed $958 million sale of MAP Pharmaceuticals Inc. to Allergan Inc. The plaintiffs’ case was weak, since they admitted in their allegations that MAP ran a fair auction. Still, they wanted more information about the cash flow analysis that MAP’s bankers at Centerview Partners Holdings LLC performed. But, the judge wrote, “I conclude that the plaintiffs’ demands for more fulsome disclosure does not justify the costs to stockholders of the affected companies of an expedited injunction proceeding. More fulsome disclosure is, under the precedents of our Supreme Court and this court, not in itself helpful. See the dictionary definition of fulsome.”

What he meant was, more disclosure is not better disclosure. “Additional disclosure is useful when it materially adds to the mix of information the stockholders receive to make an informed decision,” Strine wrote. “The plaintiffs simply desire more disclosure about the banker’s work and more details about the process, without making any colorable showing that the additional details they seek would alter in any meaningful sense the mix of information now available to stockholders.”

Glasscock went into greater detail in a 17-page opinion issued on Feb. 25 in which he declined to expedite litigation by shareholders of BioClinica Inc. who challenged the company’s $123 million agreement to sell to JLL Partners Inc. The plaintiffs argued that BioClinica gave JLL “a revised 2013 capital expenditure budget, yet failed to explain in its 14D-9 why the revisions took place,” as the target should have done. But, wrote Glasscock, Delaware law on proxy disclosures does not require such detail. Shareholders are entitled only to management’s “best estimates” of future performance when they were the only estimates used by a banker in rendering a fairness opinion. The judge therefore declined to require disclosure of the information.

The plaintiffs also argued that the nondisclosure agreement signed by losing bidders for BioClinica combined with the company’s poison pill locked in JLL’s victory and therefore violated Delaware law by precluding other bidders. The NDA allows a bidder to launch a tender offer for BioClinica stock, though the plaintiffs argued that BioClinica’s poison pill effectively mooted that right. Glasscock found that the poison pill did not preclude rival bids.

One lawyer not involved in the case said that part of the opinion reflected that some of Delaware judges are increasingly willing to dig in the weeds to evaluate deal protection packages. “Gone seem to be the days of the one paragraph sign-off on aggressive deal protection packages in favor of detailed parsing of the terms of the merger agreement, NDAs, rights plans, and so on.”

BioClinica was represented by Gregory Varallo of Richards, Layton & Finger PA in Wilmington and Marc Sonnenfeld, Elizabeth Hoop Fay and Karen Pieslak Pohlmann of Morgan, Lewis & Bockius LLP in Philadelphia, while six firms teamed to advise the shareholder plaintiffs.

Posted by Dennis McCarthy