A recent decision from the Delaware Court of Chancery examines the liability that directors may face for failing to fulfill their fiduciary duty of disclosure to stockholders—including mandatory nominal damages when the violation causes “impairment of economic or voting rights.” In Chatham Asset Management, LLC v. Papanier, C.A. No. 2017-0088-AGB (Del. Ch. Dec. 22, 2017), the court addressed claims related to a Tender Offer by a casino company called Twin River Worldwide Holdings, Inc. to purchase up to 250,000 shares of its common stock.
Background: The claims related to certain officers and directors allegedly making materially false and misleading statements in the Offer to Purchase in connection with the sale of their shares related to the Tender Offer. The Offer to Purchase did not indicate that the insiders would be promptly selling their shares.
Key Principles of Law: The court explained the fiduciary duty of disclosure that all directors must comply with. Namely: “directors of Delaware corporations are under a fiduciary duty to disclose fully and fairly all material information within the board’s control when it seeks shareholder action.” Relying on U.S. Supreme Court case law, prior Delaware decisions have held that a fact is material if “there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote.”
The core of the disclosure claim in this case was that the purpose of the Tender Offer as stated in the Offer to Purchase was not accurate–to the extent that certain officers and directors intended to sell their shares immediately in connection with the Tender Offer but that was not clearly stated.
Compensatory v. Nominal Damages:
Compensatory damages for a disclosure claim are only available when a complaint pleads facts showing that “the damages are logically and reasonably related to the harm or injury for which compensation is being awarded. Put differently, a failure to disclose material information will not provide a basis for compensatory damages from defendant directors absent proof of: (i) a culpable state of mind or non-exculpated gross negligence, (ii) reliance by the stockholders on the information that was not disclosed, and (iii) damages proximately caused by that failure.” See footnote 40.
Nominal damages, by comparison, are subject to a different analysis. The Delaware Supreme Court was cited in this decision for the statement of law that when there is a violation of a duty of disclosure of directors: “. . . there must at least be an award of nominal damages where directors have breached their disclosure duties in a corporate transaction that has in turn caused impairment to the economic or voting rights of stockholders.” (emphasis added) See footnote 43.
The court held that based on the facts presented, there was a reasonably conceivable claim for nominal damages, at the motion to dismiss stage, because it was adequately alleged by a stockholder that it was forced to tender its shares for stock prior to an increase in the stock price, thereby impairing its economic rights. If the stockholder prevailed on its disclosure claim after trial, an award of nominal damages would serve the “purpose of declaring an infraction” of the rights of the stockholder and the commission of a wrong. See footnote 45.
This decision is of practical importance because in the context of disclosure claims, establishing damages that were proximately caused by the disclosure is not often easy to do, and this decision explains that at least nominal damages are required if a disclosure claim is proven to have caused “impairment to the economic or voting rights of the stockholder.” See footnotes 42 and 43.