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Nguyen v. Barrett, C.A. No. 11511-VCG (Del. Ch. Sept. 28, 2016) (Glasscock, V.C.)

September 28, 2016

In this memorandum opinion, the Court of Chancery dismissed post-closing disclosure claims brought by a stockholder of Millennial Media, Inc. (the “Company”) challenging the Company’s merger with AOL, Inc. (the “Merger”). In doing so, the Court highlighted the limited path to success that plaintiffs have in seeking damages for post-closing disclosure claims.

This action arose from AOL’s acquisition of Millennial Media pursuant to a merger agreement and tender offer. Prior to the closing of the tender offer, plaintiff, a stockholder of the Company (“Plaintiff”), filed a complaint challenging the Merger based on a list of roughly 30 disclosure claims.  Plaintiff thereafter moved for a preliminary injunction based on one of the disclosure claims, but the Court rejected the motion, finding that the omitted disclosure was immaterial.  The tender offer ultimately closed after just over 80% of the Company’s shares were tendered, leading Plaintiff to amend his complaint to seek post-closing damages for two of his disclosure claims.

The Court first explained that a plaintiff bringing a post-closing disclosure claim “must allege facts making it reasonably conceivable that there has been a non-exculpated breach of fiduciary duty by the board in failing to make a material disclosure.” Plaintiff was thus required to show that the board breached its fiduciary duty of loyalty—that is, that a majority of the board was not independent and disinterested or acted in bad faith—in failing to make certain material disclosures.  The Court clarified that this standard differs from the standard applicable to a pre-closing disclosure claim, pursuant to which a plaintiff need only demonstrate “a reasonable likelihood of proving that the alleged omission or misrepresentation is material.”

In his first disclosure claim, Plaintiff claimed that the board of directors of the Company (the “Board”) made selective disclosure of certain financial projections in the proxy statement for the Merger (the “Proxy”). Specifically, Plaintiff alleged that the Proxy should have disclosed certain unlevered, after-tax free cash flow projections (“UFCF”) prepared by the Company’s banker, LUMA Securities LLC (“LUMA”), along with the components of the UFCF figures, because all of the components of the UFCF were prepared by Company management and LUMA merely plugged those numbers into a formula without any independent judgment.

The Court, first noting that it already rejected this claim in connection with Plaintiff’s motion for preliminary injunction, found Plaintiff’s argument unavailing the second time around and dismissed the first disclosure claim. The Court stated that, even if the UFCF disclosures were material, Plaintiff failed to plead facts making it reasonably conceivable that the Board breached its duty of loyalty in failing to make the disclosure.

For his second disclosure claim, Plaintiff alleged that the Proxy’s statement that a “substantial portion” of LUMA’s fee was contingent upon the consummation of the Merger was inadequate for using the word “substantial” instead of disclosing the precise numerical percentage. Defendants argued that not only was this claim meritless, it had been waived because Plaintiff pled this disclosure claim in his first amended complaint, but abandoned it during the course of the proceedings.  Plaintiff countered that recent case law indicates a disposition towards addressing disclosure claims post-closing and that he otherwise adequately preserved the right to pursue his claims post-closing.

Rejecting Plaintiff’s arguments, the Court clarified that disclosure claims should generally be brought pre-closing because the Court has an interest in ensuring that a fully informed stockholder vote take place. The Court further noted that this interest provided the Court with a “salutary incentive” to consider disclosure claims that were pled but not pursued pre-closing to be waived.  Ultimately, the Court held that, regardless of the waiver issues, the second disclosure claim lacked merit because precedent case law indicates that it is sufficient for a company to disclose that a “substantial portion” of a banker’s fee was contingent on completion of a transaction, “absent some indication that the fee was exorbitant or unusual, or otherwise improper.”  The Court also reiterated that, even if such a disclosure were inadequate, Plaintiff did not point to any facts suggesting that the disclosure was made disloyally or in bad faith.

The Court’s holding therefore confirmed that disclosure claims brought post-closing may be more difficult to pursue than those brought pre-closing.

The full opinion is available here