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(Article from Securities Law Alert, March 2018) 

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On February 20, 2018, the Delaware Supreme Court reversed dismissal of a shareholder action that alleged that the board of directors failed to disclose the reasons why the chairman of the board, who was also the company’s founder, had abstained from a board vote on the sale of the company. Appel v. Berkman, 2018 WL 947893 (Del. 2018) (Strine, C.J.).[1] The court rejected defendants’ contention that “the reasons for a dissenting or abstaining board member’s vote can never be material.” The court explained that “when, as here, a board expresses its reasons for voting in favor of a transaction, the contrary view of an individual board member may be material to a stockholder wrestling with whether to accept the board’s recommendation.”

In the case before it, the chairman had expressed his view that it was not the right time to sell the company. Defendants argued that the chairman’s belief “was just his opinion,” rather than a “material fact that requires disclosure.” The Delaware Supreme Court found this “distinction between opinion and fact” to be “of little relevance, because proxy statements seeking approval of major transactions are filled with statements of fact about opinions, in the sense that they recount why fiduciaries and their advisors took certain actions and why they believed the transaction was in the company’s best interest.” The court stated that stockholders are “entitled to give weight to their fiduciaries’ opinions about important business matters.”

The Delaware Supreme Court emphasized that its “decision in no way implies that the reason for a particular director’s dissent or absention will always be material.” Rather, the court reaffirmed the “contextual approach” for determining whether disclosure “would materially affect the mix of information, or whether the disclosure is required to make sure that other disclosures do not present a materially misleading picture.”

Here, the court found that it is "no common thing" "[f]or a [c]hairman to abstain from voting on the sale of the business he founded." The court noted that the disclosures included so many reasons why the other directors voted in favor of the transaction that the chairman’s reasons for abstaining from the vote would “catch a reasonable stockholder’s attention.” The court found "the founder and [c]hairman's views regarding the wisdom of selling the company were ones that reasonable stockholders would have found material in deciding whether to vote for the merger or seek appraisal, and the failure to disclose them rendered the facts that were disclosed misleadingly incomplete.”