Samuel Zalmanoff v. John A. Hardy et. al, C.A. No. 12912-VCS (Del. Ch. November 13, 2018) (Slights, V.C.)

In this memorandum opinion, the Delaware Court of Chancery granted summary judgment in favor of Defendants, the directors of Equus Total Return, Inc. (“Equus”), ruling that the directors (“Defendants”) adequately fulfilled their disclosure obligations because the facts allegedly omitted from the 2016 Schedule 14A (the “Proxy”) were disclosed in a Form 10-K (the “10-K”) sent simultaneously with the Proxy.

This class action challenged the adoption by Equus’ board of directors (the “Board”) of an Equity Incentive Plan (the “EIP”) after overwhelming approval by Equus’ stockholders.  Specifically, Plaintiff Samuel Zalmanoff (“Plaintiff”), an Equus stockholder, alleged that the Board breached its fiduciary duty of disclosure by omitting material facts and making false and misleading disclosures in the Proxy that Equus filed with the SEC to solicit stockholder approval of the EIP.  Defendants moved for summary judgment, contending that, even if the Court were to assume that the allegedly omitted facts identified by Plaintiff were material, the Equus stockholders received the 10-K along with the 2016 Proxy, the 10-K contained the allegedly omitted information regarding the EIP, and, accordingly, the Board was entitled as a matter of law to rely upon disclosures contained in the 10-K.  In opposition, Plaintiff contended that the Board was obliged to disclose all the material information at issue in the Proxy or to expressly direct stockholders in the Proxy to consult the 10-K as a supplemental disclosure regarding the EIP.

The Defendants and Plaintiff presented competing cases that they claimed were directly on point.  Defendants directed the Court to Wolf v. Assaf, 1998 WL 326662 (Del. Ch. June 16, 1998), in which the Court of Chancery held that “including the disclosures . . . in a Form 10-K made a part of the proxy mailing rather than the proxy statement itself adequately informs the shareholder of the material information as a matter of law.”  Plaintiff directed the Court to ODS Technologies, L.P. v. Marshall, 832 A.2d 1254 (Del. Ch. 2003), in which the Court held that a reasonable stockholder, even after reviewing the operative proxy statement and Form 10-K, would still not have possessed all material information related to the requested stockholder action.

The Court granted the Defendants’ motion for summary judgment, holding that the Board’s simultaneous mailing of the 10-K with the Proxy was adequate to inform stockholders of material information, and, therefore, adequate to discharge the Board’s disclosure obligations as a matter of law.  The Court noted that Wolf v. Assaf was directly on point and ODS Technologies, L.P. v. Marshall was distinguishable.  Specifically, in ODS, the omitted information Plaintiff identified in his Complaint was not contained in the Form 10-K mailed simultaneously with the proxy.  Here, Plaintiff acknowledged the fact that all of the information allegedly omitted from the proxy statement was disclosed in the Form 10-K.  The Court held that, while Delaware disclosure law does not impose a duty on stockholders to rummage through a company’s prior public filings to obtain information that might be material to a request for stockholder action, it also did not require the Board to “repackage and restate information in a proxy that they are simultaneously and conspicuously providing to shareholders in another public filing.

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