Delaware Chancery Court Dismisses Post-Closing Challenge To Two-Step Merger Under Corwin Finding Tendering Stockholders Were Fully Informed

by Shearman & Sterling LLP

On July 13, 2017, Vice Chancellor Tamika Montgomery-Reeves of the Delaware Court of Chancery dismissed a former stockholder’s breach of fiduciary duty claims against the former directors of Diamond Resorts International (“Diamond”) and an aiding and abetting claim against Diamond’s financial advisor in connection with Apollo Global Management LLC’s (“Apollo”) acquisition of Diamond in a two-step merger under Section 251(h) of the Delaware General Corporation Law, 8 Del. C. § 251(h).  Appel v. Berkman, C.A. No. 12844-VCMR (Del. Ch. July 13, 2017).  Relying on Corwin v. KKR Financial Holdings LLC, 125 A.3d 304 (Del. 2015) and In re Volcano Corp. Stockholder Litigation, 143 A.3d 727 (Del. Ch. 2016), the Court held the merger was “cleanse[d]” because “the disinterested stockholders of Diamond were fully informed and uncoerced when they overwhelmingly accepted the tender offer.”
Plaintiff, a former stockholder of Diamond, brought breach of fiduciary duty claims against Diamond’s directors and an aiding and abetting claim against the financial advisor to Diamond’s strategic review committee in connection with Apollo’s acquisition of Diamond pursuant to a two-step merger in which approximately 81.26% of the outstanding shares were tendered.  Plaintiff alleged the transaction was encumbered with conflicts and that the disclosures in connection with the transaction were materially false and misleading. 
The case turned on the latter issue, because if defendants could show that the stockholder tender was fully informed—there was no allegation that the stockholders were coerced or any claim for waste—then under Corwin and In re Volcano, the Court would apply the business judgment rule.  The Court addressed and rejected each of plaintiff’s disclosure arguments in turn. 
First, plaintiff asserted that Diamond failed to disclose its chairman’s “disappointment” with the merger.  But according to the Court, “the significant weight of twenty-five years of Delaware authority” did not require that an individual director explain “the grounds of their judgment for or against a proposed shareholder action,” and the Schedule 14D-9 issued in connection with the transaction disclosed the chairman’s abstention. 
Second, plaintiff contended that Diamond’s disclosures regarding the financial advisor’s relationship with Apollo were inadequate.  The Court held otherwise.  Specifically, it found that the 14D-9 did in fact disclose relationships with Apollo portfolio companies that plaintiff alleged were omitted.  The Court also determined that disclosure of the amount of compensation paid by Apollo to the financial advisor was not required in light of the extensive disclosures that the financial advisor “has provided ‘and is currently providing’ services to Apollo-affiliated entities and has been and will be receiving compensation from Apollo” and because plaintiff’s allegation of materiality was conclusory.  The Court noted that “prudence would counsel in favor of disclosing the amount of compensation,” but concluded that “the alleged disclosure violation does not prevent the application of Corwin in light of the disclosures already provided.”  
Third, the Court concluded that plaintiff failed to show how additional information regarding a former director’s length of service with, or compensation from, various entities related to Apollo “would ‘significantly alter the total mix’ of information available to stockholders.” 
“[H]av[ing] found that the stockholders were fully informed when they tendered their shares,” the Court dismissed the breach of fiduciary duty claims against the directors.  The Court also dismissed the aiding and abetting claim against the financial advisor because plaintiff failed to demonstrate that the financial advisor acted with the requisite scienter, and such a claim “may be summarily dismissed” when the breach of fiduciary duty claims fail against the director defendants.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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