fiduciary duty issues in m&a transactions - Jackson Walker LLP

By stating that they “careful[ly] deliberat[ed],” the Board was representingto the shareholders that it had considered the Sales Process on its objective meritsand had determined that the Reclassification would better serve the Company thana merger. * * * [This] disclosure was materially misleading.The Reclassification Proxy specifically represented that the [company]officers and directors “ha[d] a conflict of interest with respect to the[Reclassification] because he or she is in a position to structure it in a way thatbenefits his or her interests differently from the interests of unaffiliatedshareholders.” Given the defendant fiduciaries’ admitted conflict of interest, areasonable shareholder would likely find significant—indeed, reassuring—arepresentation by a conflicted Board that the Reclassification was superior to apotential merger which, after “careful deliberations,” the Board had “carefullyconsidered” and rejected. In such circumstances, it cannot be concluded as amatter of law, that disclosing that there was little or no deliberation would notalter the total mix of information provided to the shareholders.* * *We are mindful of the case law holding that a corporate board is notobligated to disclose in a proxy statement the details of merger negotiations thathave “gone south,” since such information “would be [n]either viably practical[n]or material to shareholders in the meaningful way intended by … case law.”Even so, a board cannot properly claim in a proxy statement that it had carefullydeliberated and decided that its preferred transaction better served the corporationthan the alternative, if in fact the Board rejected the alternative transactionwithout serious consideration.Also in 2009, in Pfeffer v. Redstone 97 in a shareholder breach of fiduciary duty classaction against a corporation’s Board and controlling shareholder after the corporation divesteditself of its controlling interest in a subsidiary by means of a special cash dividend followed byan offer to parent company stockholders to exchange their parent stock for subsidiary stock, 98 theDelaware Supreme Court explained that it was not a breach of the duty of candor to fail todisclose in the exchange offer prospectus an internal cash flow analysis which showed that thesubsidiary would have cash flow shortfalls after the transactions, but which had been prepared bya lower level employee and never given to the Board:For the Viacom Directors to have either misstated or failed to disclose thecash flow analysis in the Prospectus, those directors must have had reasonable9798___ A.2d ___, 2009 WL 18887 (Del. 2009).The Court found the exchange offer to be purely voluntary and non-coercive, and not to require entire fairness revieweven though it was with the controlling stockholder. Further, since there was no representation that the exchange ratiowas fair, there was no duty to disclose the methodology for determining the exchange ratio, as would have beennecessary to ensure a balanced presentation if there had been any disclosure to the effect that the exchange ratio wasfair. As the exchange offer was non-coercive and voluntary, the parent had no duty to offer a fair price. Theprospectus disclosed that the Boards of parent and subsidiary were not making any recommendation regarding whetherstockholders should participate in the exchange offer and were not making any prediction of the prices at which therespective shares would trade after the exchange offer expired.5446095v.130