An Eckert Seamans associate prepared this overview.
In a recent letter opinion in the case styled Vento v. Curry, C.A. No. 2017-0157-AGB, Chancellor Bouchard granted the plaintiff’s motion to preliminarily enjoin a stockholder vote until information regarding the company’s financial advisor’s interests had been fully disclosed.
Background: Consolidated Communications Holdings, Inc.’s (the “Company”) sought to acquire FairPoint Communications, Inc. (“FairPoint”) through a stock-for-stock merger. Morgan Stanley & Co. LLC (“Morgan Stanley”) served as the lead financial advisor to the Company and provided a fairness opinion in connection with the transaction. An affiliate of Morgan Stanley, “MSSF,” was to provide $935 million in debt financing for the merger.
Because the merger agreement called for issuance of more than 20% of the Company’s common stock to FairPoint stockholders, as a NADSAQ listed company, the Company’s stockholders were required to vote to approve the proposed transaction. After learning that a special meeting would be held to consider approving the share issuance, the plaintiff (a Company stockholder) filed a complaint against Company board members alleging that they breached their fiduciary duties by failing to disclose information relating to Morgan Stanley’s conflicts of interest with respect to the proposed transaction.
Although the Court mentioned that the plaintiff waited an inordinate amount of time to file the motion for preliminary injunction, the Court determined that the issue had not been barred by laches, and therefore, the Court considered the merits of the motion.
Parties’ Contentions: Plaintiff asserted that although the Company’s Amended Registration Statement (the “Statement”) provided that Morgan Stanley or its affiliates would receive fees from financing the merger, the Statement failed to disclose details concerning the amount of such expected compensation. The Company argued that it provided enough information in its Statement for the stockholders to adequately quantify the amount.
Court’s Analysis: The Court explained that full disclosure of investment banker compensation and potential conflicts are required under Delaware law. Relying on David P. Simonetti Rollover IRA v. Margolis, 2008 WL 5048692 (Del. Ch. June 27, 2008), the Court determined that resolution of the disclosure claim depended on whether Morgan Stanley’s interest in the transaction was material and, if so, whether that interest was quantifiable.
As an initial matter, that MSSF was a separate entity from Morgan Stanley did not change the analysis. As an affiliate of Morgan Stanley, a potential conflict of interest remained.
In evaluating the disclosure claim, the Court found that information related to the magnitude of the fees to which MSSF was potentially entitled was material. With respect to the adequacy of the disclosure, the Court determined that the “buried facts” doctrine—whether information is “buried” in the proxy materials—was particularly applicable. In accordance with the buried facts doctrine, because the stockholders would be required to piece together all the information in the 248-page Statement, to then “guess” what the compensation arrangement was, the Court held that disclosure was inadequate.
Ultimately, the Court explained that a stockholder should not have to “go on a scavenger hunt to try to obtain a complete and accurate picture of a financial advisor’s financial interests in a transaction.” The amount of fees MSSF stood to receive from the proposed transaction was both material and quantifiable. Thus, there was “simply no excuse for [the Company’s] failure to disclose that information in a clear and transparent manner along with related information bearing on its financial advisor’s potential conflict of interest.”
Conclusion: Because disclosure was inadequate, the Court held that the plaintiff satisfied each of the requisite preliminary injunction elements: (1) a reasonable probability of success on the merits; (2) irreparable harm from an uniformed stockholder vote; and (3) that the need for protection outweighed any harm to the Company—a slightly delayed vote—if the Court granted the injunction.
Therefore, the Court preliminarily enjoined the stockholders’ special meeting until five days after the Company had supplemented its disclosures to include a direct explanation of the amount of financing fees Morgan Stanley or its affiliates might receive in connection with the merger.