M & A Law Prof Blog

Editor: Brian JM Quinn
Boston College Law School

Friday, May 3, 2013

Delaware's duty of disclosure

Vice Chancellor Laster issued an opinion for In re Wayport Shareholder Litig on Wednesday.  This post-trial opinion deals with a number of interesting issues, but it does one thing that is really helpful for people like me who are always looking for cases that students can look at that distill the differences in doctrine and approach.  In this case, the Vice Chancellor does a nice summary of the four strains of doctrinal thought that define the Delaware duty of disclosure.  I'm reproducing a heavily edited version of that section below (read the opinion for all the internal cites):  

The “duty of disclosure is not an independent duty, but derives from the duties of care and loyalty.” The duty of disclosure arises because of “the application in a specific context of the board’s fiduciary duties . . . .” Its scope and requirements depend on context; the duty “does not exist in a vacuum.” When confronting a disclosure claim, a court therefore must engage in a contextual specific analysis to determine the source of the duty, its requirements, and any remedies for breach. Governing principles have been developed for recurring scenarios, four of which are prominent.

The first recurring scenario is classic common law ratification, in which directors seek approval for a transaction that does not otherwise require a stockholder vote under the DGCL. If a director or officer has a personal interest in a transaction that conflicts with the interests of the corporation or its stockholders generally, and if the board of directors asks stockholders to ratify the transaction, then the directors have a duty “to disclose all facts that are material to the stockholders’ consideration of the transaction and that are or can reasonably be obtained through their position as directors.” The failure to disclose material information in this context will eliminate any effect that a favorable stockholder vote otherwise might have for the validity of the transaction or for the applicable standard of review. (“With one exception, the ‘cleansing’ effect of such a ratifying shareholder vote is to subject the challenged director action to business judgment review, as opposed to ‘extinguishing’ the claim altogether (i.e., obviating all judicial review of the challenged action).

A second and quite different scenario involves a request for stockholder action. When directors submit to the stockholders a transaction that requires stockholder approval (such as a merger, sale of assets, or charter amendment) or which requires a stockholder investment decision (such as tendering shares or making an appraisal election), but which is not otherwise an interested transaction, the directors have a duty to “exercise reasonable care to disclose all facts that are material to the stockholders’ consideration of the transaction or matter and that are or can reasonably be obtained through their position as directors.” A failure to disclose material information in this context may warrant an injunction against, or rescission of, the transaction, but will not provide a basis for damages from defendant directors absent proof of (i) a culpable state of mind or nonexculpated gross negligence, (ii) reliance by the stockholders on the information that was not disclosed, and (iii) damages proximately caused by that failure.

A third scenario involves a corporate fiduciary who speaks outside of the context of soliciting or recommending stockholder action, such as through “public statements made to the market,” “statements informing shareholders about the affairs of the corporation,” or public filings required by the federal securities laws. In that context, directors owe a duty to stockholders not to speak falsely:

Whenever directors communicate publicly or directly with shareholders about the corporation’s affairs, with or without a request for shareholder action, directors have a fiduciary duty to shareholders to exercise due care, good faith and loyalty. It follows a fortiori that when directors communicate publicly or directly with shareholders about corporate matters the sine qua non of directors’ fiduciary duty to shareholders is honesty.

“[D]irectors who knowingly disseminate false information that results in corporate injury or damage to an individual stockholder violate their fiduciary duty, and may be held accountable in a manner appropriate to the circumstances.” (“When the directors are not seeking shareholder action, but are deliberately misinforming shareholders about the business of the corporation, either directly or by a public statement, there is a violation of fiduciary duty.”).  Breach “may result in a derivative claim on behalf of the corporation,” “a cause of action for damages,” or “equitable relief . . . .”

The fourth scenario arises when a corporate fiduciary buys shares directly from or sells shares directly to an existing outside stockholder. Under the “special facts doctrine” adopted by the Delaware Supreme Court in Lank v. Steiner, a director has a fiduciary duty to disclose information in the context of a private stock sale “only when a director is possessed of special knowledge of future plans or secret resources and deliberately misleads a stockholder who is ignorant of them.” If this standard is met, a duty to speak exists, and the director’s failure to disclose material information is evaluated within the framework of common law fraud. If the standard is not met, then the director does not have a duty to speak and is liable only to the same degree as a non-fiduciary would be. It bears emphasizing that the duties that exist in this context do not apply to purchases or sales in impersonal secondary markets. 





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