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Chancery Issues Preliminary Injunction to Enjoin Transaction Due to Lack of Adequate Disclosure in Proxy Statement

By Francis G.X. Pileggi

Maric Capital Master Fund, Ltd. v. PLATO Learning, Inc., C.A. No. 5402-VCS (Del. Ch. May 13, 2010), read opinion here.

Issue Addressed
Whether a proposed merger should be enjoined due to the breach of the disclosure duty in connection with the proxy statement.

Holding
Although the Court rejected an argument that the Revlon duty was breached, the Court did enjoin a proposed merger after a preliminary injunction hearing in light of the Court concluding that corrective disclosures were required on three issues in the proxy statement.

Overview
The Court explained three parts of the proxy statement that breached the disclosure duty and warranted injunctive relief. See In Re Transkaryotic Therapies, Inc., 954 A.2d 346, 360-61 (Del. Ch. 2008)(breach of the disclosure duty leads to irreparable harm).

This short decision was issued on the same day as the preliminary injunction hearing. At the preliminary injunction hearing the Court initially denied a request for a preliminary injunction based on the Revlon issue, but later the same day, after reviewing the record, issued this opinion that did grant a preliminary injunction until corrective disclosures in the proxy statement were made. The three parts to the proxy statement that the Court reasoned were in need of correction before the merger could proceed, were the following:

1) The proxy statement presented a materially misleading description of how the investment bank that provided the board with a fairness opinion, came to its discount rate for the discounted cash flow valuation. See In Re MONY Group Inc. S'holder Litig., 852 A.2d 9, 25 (Del. Ch. 2004)(Once directors take it upon themselves to disclose information, that information must not be misleading); See also Lynch v. Vickers Energy Corp., 383 A.2d 278, 281 (Del. 1977)(holding that defendants violated their duty of disclosure when they disclosed a 'floor value, but not an equally reliable ‘ceiling' value, because ‘full disclosure . . . was a prerequisite to endorsing one value over another'').

2) The Court determined that the proxy statement selectively disclosed projections relating to PLATO's future performance. In particular, the Court reasoned that 'the proxy statement for some inexplicable reason excised the free cash flow estimates that had been made by PLATO's management and provided to [the investment banker].' See Simonetti Rollover IRA v. Margolis, 208 WL 5048692, at * 10 (Del. Ch. June 27, 2008)('A proxy statement should ‘give the stockholders the best estimate of the company's future cash flow as of the time the board approved the transaction'').

3) The third corrective disclosure the Court required was based on the proxy statement not providing sufficient information about the discussions between management and the prospective purchaser regarding the retention of existing management. The Court referred to handwritten notes and other documents indicating the discussions that current management had with the prospective purchaser. The Court concluded as follows: 'Although I see no reason in the record or from my understanding of industry practices to believe that PLATO's management would not have rationally believed that another private equity buyer would provide incumbent management with similar incentives, the proxy statement in my view creates the materially misleading impression that management was given no expectations regarding the treatment they could receive from Thomas Bravo.'
 

Full post as published by Delaware Corporate and Commercial Litigation Blog on May 17, 2010 (boomark / email).