Alleged Failure To Disclose Company’s Financial Projections Insufficient For Court To Enjoin Shareholder Vote On Merger

In a transcript ruling in Dent v. Ramtron Int’l Corp., C.A. No. 7950-VCP (Del. Ch., November 19, 2012), the Court denied the plaintiff’s motion for a preliminary injunction to enjoin a shareholder vote on a merger between Ramtron and Cypress Semiconductor Corp.

Issue Addressed:  Whether the Court should preliminarily enjoin a shareholder vote on a merger on allegations that the company’s proxy statement is false and misleading in that the company failed to provide disclosures of financial projections thereby prohibiting the company’s stockholders from making an informed decision on whether to vote in favor of the merger or seek appraisal.

Short Answer: No.

Brief Background

The plaintiff stockholder of Ramtron brought this class action alleging that Ramtron and its directors failed to provide sufficient disclosures to allow the company’s stockholders to make an informed decision on whether to vote in favor of the merger or seek appraisal.  On March 8, 2011, Cypress made an unsolicited proposal to acquire Ramtron for $3.01 per share which was rejected.  Negotiations continued and eventually Cypress and Ramtron entered into a merger agreement whereby Cypress would make a tender offer for all outstanding shares of Ramtron’s common stock for $3.10 and then Cypress would merge with Ramtron and the remaining shareholders would get the merger consideration.  The agreement also had a top-up option which required Cypress to secure more than 86% of Ramtron’s outstanding stock.  Because Cypress only acquired 78% of the outstanding stock in the tender offer, it could not exercise the top-up option so it decided to pursue a Section 251 long-form merger.  The stockholder vote on the merger was scheduled to occur on November 20, 2012, the day after the hearing on the preliminary injunction. 

On June 19, 2012, the plaintiff had sought a TRO with respect to the merger in Colorado state court but the court denied that request.  Ten days after that request was denied, the plaintiff filed for a preliminary injunction in Delaware alleging a breach of fiduciary duty by the directors and and aiding and abetting the claim against defendants Cypress and Rain Acquisition Corp. (the Cypress acquisition vehicle).  Plaintiff’s primary argument was that the defendants breached their fiduciary duty of candor by failing to disclose Ramtron management’s financial projections that covered the second half of 2012 and the years 2013 through 2016.

The defendants responded that the management projections are neither accurate nor reliable.  In addition, they argued that the projections were not material and “disclosure of the projections would create a greater risk of confusing Ramtron’s stockholders that informing them on whether to accept the $3.10 offer price or to seek appraisal.”  The defendants also pointed out that: (i) Cypress did not have access to the projections when it decided to enter into the merger agreement; (ii) approximately 75% of Ramtron’s shareholders did not need to see the projections in order to decide whether to tender their shares; (iii) the defendants already disclosed the financial analyses of the company’s financial advisor which showed that the DCF analysis had a equity value between $3.57 and $5.01 per share as compared to the $3.10 merger consideration; (iv) the plaintiff had already admitted that he did not need those financial projections to decide that the merger consideration was too low; and (v) the plaintiff would suffer no harm or is an inadequate class representative and lacks standing to bring the class action because he had already decided to vote against the merger and to pursue appraisal. 

Analysis

Before the Court turned to the requirements for a preliminary injunction, it noted as an initial matter, that it was not persuaded that the plaintiff would suffer no harm or that he was not an adequate class representative.  Turning to the first requirement for a preliminary  injunction, reasonable probability of success on the merits, the plaintiff argued that the board breached its duty of candor by failing to include the financial projections.  The Court noted that Delaware law does not require disclosure of inherently unreliable or speculative information which would tend to confuse shareholders or inundate them with an overload of information.  In addition,  there is no per se duty to disclose financial information furnished to or relied upon by an investment banker and to be subject to mandated disclosure, the projections must be material.  Here, the Court found that the financial projections were not material and so the plaintiff could not show a reasonable probability of success on the merits — “it is unlikely that a reasonable stockholder would find the projections to be important as opposed to merely helpful in deciding how to vote on the merger or whether to seek appraisal.”

With respect to the irreparable harm element, the Court found that the “plaintiff will not suffer irreparable harm if injunctive relief is denied in the sense that plaintiff supposedly would be required to make an uninformed stockholder vote.”  The Court noted that “if plaintiff ultimately succeeds in demonstrating that the disclosures were materially deficient, plaintiff can pursue a quasi-appraisal remedy.”  On the other hand, if the Court were to enjoin the vote, the defendants would be faced with several problems – no other interested buyer for Ramtron emerged, the merger consideration which represents a 71% premium over the trading price would be put at risk, and “the uncertainty surrounding an announced but unconsummated merger.”  As a result, the Court denied the motion.