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The Duty of Disclosure and Appraisal: Say What?

November 1, 2005, Mark A. Morton, Roxanne L. Houtman


In connection with a merger that triggers appraisal rights, directors of Delaware corporations are subject to two parallel duties of disclosure:  one grounded in the appraisal statute, 8 Del. C. § 262, and the other grounded in common law fiduciary duties.  With respect to the former, Section 262(d)(1)-(2) requires that a corporation notify shareholders of the right to seek an appraisal and of the merger’s effective date.  As part of fulfilling this statutory duty, the corporation is required to provide shareholders with a copy of the appraisal statute.[2]

More importantly, directors of a Delaware corporation owe shareholders a fiduciary duty of disclosure.[3]  This duty flows from the triad of fiduciary duties of care, loyalty and good faith.[4]  Pursuant to the duty of disclosure, directors are required to “disclose fully and fairly all material information within the Board’s control.”[5]

What is less clear, however, is the nature and extent of the information that directors must give shareholders when presenting them with the option of accepting the merger consideration or perfecting a demand for appraisal.  The Delaware Supreme Court has indicated only that “[w]here the only choice for the minority stockholders is whether to accept the merger consideration or seek appraisal, they must be given all the factual information that is material to that decision.”[6]  The Court has not, however, clearly specified what factual and financial information should be given to shareholders.

One of the earliest cases to address the adequacy of appraisal disclosure was Shell Petroleum, Inc. v. Smith.[7]  In connection with a short-form merger, the defendant-majority shareholder submitted to minority shareholders a discounted cash flow analysis that understated future net cash flow by approximately $1 billion.[8]  The Supreme Court held that the majority shareholder “bears the burden of showing complete disclosure of all material facts relevant to the minority shareholders’ decision whether to accept the short-form merger consideration or seek appraisal.”[9]  Adopting the federal standard of “materiality,” the Court stated that “[a]n omitted fact is material if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote . . .  [T]here must be a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the ‘total mix’ of information made available.”[10]  In Shell, the Court found the $1 billion difference both highly relevant and material to the minority shareholders’ decision.[11]  Accordingly, the Court held that the defendant breached its fiduciary duty of disclosure.[12]

Nearly eight years later, the Delaware Supreme Court further elaborated on its earlier decision in Shell when it issued its decision in Skeen v. Jo-Ann Stores, Inc.[13]  In that case, plaintiff-shareholders unsuccessfully alleged that specific information pertaining to a target company’s valuation was needed to make an informed decision as to whether to accept the merger consideration or seek judicial remedies.[14]  The court rejected the shareholders argument that minority shareholders are entitled to receive all of the financial information necessary to make an “independent determination of fair value.”[15]  Moreover, the court declined to adopt a new standard whereby directors and controlling shareholders would be subject to a more exacting duty of disclosure when appraisal rights are at issue.[16]  In Skeen, the court found that the defendant company had provided the minority shareholders with the basic, relevant financials, thus satisfying its fiduciary duty of disclosure.[17]

Duties of Disclosure of Private Companies: No Diluted Duties

The fiduciary duty of disclosure applies equally to directors of public and private companies.  In Erickson v. Centennial Beauregard Cellular, L.L.C., the Court of Chancery refused to draw distinctions between the levels of disclosure required by a public company and that required by a private company.[18]  In Erickson, the plaintiff was a shareholder in a small private company, which was merged into its parent company via a short-form merger.[19]  The parent company sent the fourteen minority shareholders of the subsidiary a two-page document purporting to detail the value of the company, but the parent company failed to provide shareholders with basic financial statements.[20]

In considering the plaintiff’s objections, the court first noted the dilemma that exists for all investors in a private company - “[plaintiff]-stockholder had no objective market data upon which to measure the fairness of the proposed merger consideration.”[21]  Moreover, the Court noted, shareholders in private companies do not always possess the same level of access to general information about their companies, as shareholders of public companies may have.[22]  In particular, the court remarked that the minority shareholders in the instant case “had no way of knowing what the company’s operations were and, as a result, may not have even a rudimentary understanding of [the company’s] products or services.”[23]  In that setting, the court concluded that defendants’ failure to provide such information constituted a breach of the fiduciary duty of disclosure.[24]  In doing so, the Court demonstrated an unwillingness to dilute the disclosure requirements for private companies and signaled that it may require the disclosure of additional material where private company shareholders are unable to locate such information publicly.

The Erickson decision is also important for the insight it offers into what the Delaware Court of Chancery considers minimum levels of required disclosure for both public and private companies.[25]  Specifically, the Court commented on four areas where disclosure of factual and financial information will aid the shareholder in making an informed decision regarding appraisal rights.[26]

1. Current and Historical Financial Statements

In Erickson, the company provided minority shareholders with two valuation methods:  recent transaction and discounted cash flow analysis.[27]  The court observed, however, that both analyses were based on a single calculation, earnings before interest, tax, depreciation and amortization (EBITDA).[28]  The company did not include any financial statements, or other comparable reports which would allow the shareholders to perform their own analysis.[29]  Chancellor Chandler commented that the company failed to provide “information . . . related to the company’s revenue streams, levels of working capital, or any other financial information that would permit a stockholder to perform even the most basic financial ratio analysis.”[30]

2. Description of the Company’s Business and Prospects

The defendants in Erickson also failed to provide shareholders with any information pertaining to the company’s business, operations or plans for the future.[31]  The court stated that “some indication of business revenue projections is . . . necessary for shareholders to determine whether they are receiving a fair price for their shares.”[32]  The court also rejected the defendant’s argument that, because it supplied plaintiffs with the discounted cash flow analysis, plaintiffs were alerted to the company’s projections.[33]  Chancellor Chandler reasoned that “stockholders should not have to perform sophisticated financial calculations, derived from cash flow analyses provided without any underlying information, in order to figure out management’s view of the company’s future business.”[34]

3. Industry Specific Valuation Metrics

Ordinarily, minority shareholders are not entitled to receive disclosure pertaining to “every conceivable methodology to value their shares.”[35]  In this case, however, the plaintiff argued that one particular methodology, the “per-pop” valuation, the cellular industry standard, should have been made available to shareholders.[36]  Plaintiff argued, and the court agreed, that the information by which the industry standard valuation method could be calculated should have been made available to shareholders, even if the valuation itself was not.[37]  Although the information was publicly available, the company had failed to inform shareholders of the manner in which they could obtain said information.[38]  In fact, the court determined that the shareholders “likely had no reason to know the information was available.”[39]  In reaching this conclusion, the Court signaled that if there is a standard valuation method for a particular industry then the company should disclose the information necessary to perform the valuation.

4. Valuation Data and Background

While the court did not specifically indicate the extent of the valuation data that is to be made available to minority shareholders, Chancellor Chandler declared that use of a single number or value which “purports to encompass the value of [a company], not supported with any financial information . . . is simply not sufficient, as a matter of law.”[40]  Chancellor Chandler explained that additional information and clarification is needed, “including the derivation of revenues, allocation of expenses, [and the] basis for selecting the []multiple [used].”[41]  In Erickson, the court found that the “valuation analysis presented to [s]tockholders was so bereft of actual information that, while all of the requested information may not have been required, defendants had a duty to provide at least some further indication of the company’s value to its stockholders.”[42]  Thus, it is clear that the disclosure provided by directors (and/or majority shareholders) must include financial data that will allow shareholders to acquire an accurate sense of the company’s value before they decide whether to accept the proposed merger consideration or demand appraisal rights.

Gilliand v. Motorola, Inc.: Minimum Disclosures in a Short Form Merger

In 2004, the Delaware Court of Chancery addressed disclosure requirements in a going-private transaction.[43]  The basic obligations are the same: compliance with statutory requirements and with the fiduciary duty of disclosure, which the Court described as the duty to “provide substantive, financial information relating to the value of the company.”[44]  The issue in Gilliand, however, was whether the fiduciary duty of disclosure can be satisfied solely “by implicit reference to the ‘total mix’ of information disseminated in connection with a contemporaneously concluded tender offer.”[45]

In an earlier Delaware Supreme Court decision, Zirn v. VLI Corporation, the Supreme Court recognized that short-form mergers effectuated under Section 253 are “essentially summary procedure,” and that the requisite notice is intended primarily to inform shareholders of the actions taken and their right to seek an appraisal remedy.[46]  The Zirn court found that because the defendant corporation had made substantial disclosure at the time of the tender offer, and because the parties had negotiated the transaction at arms length, the company could provide minority shareholders with a less detailed disclosure.[47]  However, while the Court did not require “voluminous” additional disclosure, it is worth noting that the defendant had provided minority shareholders with high/low bid quotes for the previous two years, summary financial information for the preceding five years, and instructions on where to find more complete SEC filings.[48]

As in Zirn, both the acquiring and target companies in Gilliand made substantial disclosure to minority shareholders during the first-step tender offer.[49]  Consequently, the court concluded that Motorola was not required to send voluminous disclosure with the notice of merger.[50]  In Gilliand, however, the notice supplied by the acquiror, Motorola, provided notice only of the merger and the effective date.[51]  The defendant argued that this minimum level of disclosure was sufficient, as more extensive financial disclosure had been made in the course of the recently completed tender offer.[52]  Further, Motorola pointed to various public documents, such as the target company’s Form 10-K and other SEC filings, that contained the information plaintiffs alleged they should have been given.[53]

The Court observed, however, that Motorola’s notice did not direct shareholders to the location where such public information could be located, and the manner in which it could be obtained.[54]  The Court also noted that, notwithstanding the fact that the information may be widely available to the public, “it will always be a simple exercise to identify the relevant disclosure documents, and either include them in the notice, or extract and disclose summary information from them, and advise stockholder how to obtain more complete information.”[55]  Thus, “a notice given pursuant to section 262 must contain, at a minimum, summary financial and trading data and reference to the publicly available sources from which more complete information is available.”[56]


Based upon the foregoing, it is apparent that in connection with a merger for which appraisal rights are available the fiduciary duty of disclosure requires that directors and majority shareholders provide minority shareholders with substantive financial and factual information.  The information disclosed must be sufficient to permit shareholders to make an informed decision as to whether to accept the proposed merger consideration or seek the judicial remedy of appraisal.  While the Delaware courts have not explicitly stated what documents should be included with the notice of merger, the aforementioned cases, namely Erickson, shed some light on the kinds of documents that should be disclosed.  In particular, the following documentation should be included with the Section 262 notice:

  • Current and historical financial statements or comparable reports that will allow shareholders to calculate basic financial ratios.  
  • Information describing the company’s current business and operations, and business revenue projections.
  • Information relating to industry-specific valuation metrics and/or details on where to locate and obtain such information if available within the public sphere.  
  • Substantive valuation data, and background information supporting the valuation information.

Where appraisal rights arise as a result of a negotiated tender offer and prompt short-form merger, the Court of Chancery has indicated that the requisite disclosures should include summary financial and trading information, reference to relevant disclosure documents, and directions on how the shareholder can locate and obtain copies of information available from public sources.



1    Mark A. Morton is a partner and Roxanne L. Houtman is an associate in the Wilmington, Delaware law firm of Potter Anderson & Corroon LLP.  The views expressed are solely those of the authors and do not necessarily represent the views of the firm or its clients.
2   8 Del. C. § 262(d)(1). 
3   Shell Petroleum, Inc. v. Smith, 606 A.2d 112 (Del. 1992). 
4   Skeen v. Jo-Ann Stores, Inc., 750 A.2d 1170, 1172 (Del. 2000).  See also Turner v. Bernstein, C.A. No. 16190 (Del. Ch. Feb. 9, 1999), slip op. at 15-16 (stating that the duty of disclosure “flows from the broader fiduciary duties of care and loyalty [and] is triggered where directors . . . present to stockholders for their consideration a transaction that requires them to cast a vote and/or make an investment decision, such as whether or not to accept a merger or demand appraisal”).
5   Malone v. Brincat, 772 A.2d 5, 10 (Del. 1998). See also, Stroud v. Grace, 606 A.2d 75, 84 (Del. 1992) (“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”).
6   Glassman v. Unocal Exploration Corp., 777 A.2d 242, 248 (Del. 2001). 
7   606 A.2d 112 (Del. 1992). 
8   Id. at 114. 
9   Id. (citing Bershad v. Curtiss-Wright Corp., 535 A.2d 840, 846 (Del. 1987)). 
10   Id. (citing TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976)).
11   Id. at 115. 
12   Id
13   750 A.2d 1170 (Del. 2000). 
14   Id. at 1172.  Minority shareholders were provided with the company’s audited and unaudited financial statements, the investment banker’s fairness opinion, and the company’s quarterly market prices.  Id. at 1173.  Plaintiffs argued that in addition to the foregoing, they were entitled to summary information about the methodologies employed by the investment bankers and management’s 5-year projected performance.  Id.
15   Id. at 1174.  The Court of Chancery remarked that “[o]mitted facts are not material simply because they might be helpful.  To be actionable, there must be a substantial likelihood that the undisclosed information would significantly alter the total mix of information already provided.”  Id.  (emphasis added).
16   Id. at 1171. 
17   The Court noted that to successfully assert a breach of fiduciary duty claim, plaintiffs must “‘allege that facts are missing from the information statement, identify those facts, state why they meet the materiality standard and how the omission caused injury.’”  Id. at 1173  (citing Louden v. Archer-Daniels-Midland Co., 700 A.2d 135, 140 (Del. 1997)).
18   2003 WL 1878583 (Del. Ch. 2003). 
19   Id. at *1. 
20   Id
21   Id. at *6. 
22   Id. at *7. 
23   Id
24   Id
25   Id. at ** 6-9. 
26   Id
27   Id. at *1. 
28   Id
29   Id. at *6. 
30   Id
31   Id. at *7. 
32   Id
33   Id
34   Id
35   Id. at *8. 
36   Id
37   Id
38   Id
39   Id
40   Id. at *9. 
41   Id
42   IdSee also Nagy v. Bistricer, 770 A.2d 43, 60 (Del. Ch. 2000) (finding that directors of the controlling stockholder breached their fiduciary duty of disclosure when they failed to provide a minority shareholder with, inter alia, financial and valuation information about the target and acquiring company).
43   Gilliand v. Motorola, Inc., 859 A.2d 80 (Del. Ch. 2004). 
44   Id. at 86. 
45   Id
46   681 A.2d 1050, 1059 (Del. 1996). 
47   Id.  The Court distinguished the nature of the transaction in Zirn from uncontested corporate self-tenders and cash-out mergers where “disclosure to shareholders is normally one-sided.”  Id.  The Supreme Court noted that because the parties in Zirn negotiated the transaction at arms-length and both sides presented the shareholders with information during the tender offer stage, the “specter of intentional misinformation” was absent, and “voluminous disclosure” was not necessary.  Id.
48   Id. at 1060.
49   Gilliand, 859 A.2d at 87.  The court also noted that the acquiring company showed “fierce resistance” to Motorola’s tender offer, which resulted in “a level of disclosure at least equal to that found in a typical negotiated third-party acquisition.” Id.
50   Id. at 88. 
51   Id. at 83. 
52   Id. at 86-87. 
53   Id
54   Id. at 88. 
55   Id.  The Court added that “[i]n view of the modest cost of providing such information, a majority stockholder’s fiduciary duty requires that such information be furnished in the notice of merger.”
56   Id.