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Appel v. Berkman - 180 A.3d 1055 (Del. 2018)


Precisely because Delaware law gives important effect to an informed stockholder decision, Delaware law also requires that the disclosures the board makes to stockholders contain the material facts and not describe events in a materially misleading way.


Diamond Resorts International's board of directors recommended to its stockholders that they sell their shares to a private equity buyer, Apollo Global Management, for cash in a two-step merger transaction involving a front-end tender offer followed by a back-end merger. The proxy statement had a detailed recitation of the background leading to the merger, and the reasons for and against it. But absent from that recitation was that the company's founder, largest stockholder, and still Chairman Stephen J. Cloobeck had abstained from supporting the procession of the merger discussions, and from ultimately approving the deal, because he was disappointed with the price and the Company's management for not having run the business in a manner that would command a higher price, and that in his view, it was not the right time to sell the Company. A complaint was filed to challenge the merger. The Court of Chancery dismissed the action because the stockholders' acceptance of the first-step tender offer was fully informed. It also rejected the plaintiffs' argument that the omission of the Chairman's reasons for abstaining rendered the proxy statement materially misleading. Plaintiff appealed.


Did the court of chancery err in granting a motion to dismiss a complaint in which plaintiff stockholders challenged a merger on the basis that their acceptance of a first-step tender offer was not fully informed, specifically, that the proxy statement was materially misleading and incomplete because the recitation omitted the chairman's reasons for abstaining?




The Supreme Court of Delaware reversed. It held that the court of chancery erred in granting defendants' motion to dismiss plaintiffs' complaint challenging the merger because the stockholders' acceptance of a first-step tender offer was not fully informed. Furthermore, the Court held that the omission of the chairman's reasons for abstaining rendered the proxy statement materially misleading and incomplete, as the chairman's views regarding the wisdom of selling the company were ones that reasonable stockholders would have found material in deciding whether to vote for the merger or seek appraisal. The Court observed that for a chairman to abstain from voting on the sale of the business he founded and led is no common thing, and when his reasons for doing so contradict the board's recommendations to the stockholders, it is difficult to understand how the omission was inadvertent. But regardless of the board's reason for omitting the chairman's concerns from the disclosures, the omitted facts were material and their omission precluded the invocation of the business judgment rule standard at the pleading stage.

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