Post-Close Disclosure Claims in Nguyen v. Barrett

John Brady

Nguyen v. Barrett deals with post-close claims of breach of fiduciary duty and improper/partial disclosure arising out of a Merger Agreement between Millennial Media, Inc. (“Millennial” or “The Company”) and AOL through which AOL would acquire Millennial through a tender offer.  An Nguyen (“Plaintiff”), a Millennial shareholder, brought this action, on his behalf and behalf of Millennial shareholders, against Millennial to challenge the Merger Agreement.

This action originated as a pre-close complaint (“Pre-Close Action”), where the Plaintiff initially asserted several claims alleging “inadequate price and process, as well as some thirty disclosure violations.”  The Plaintiff sought preliminary injunctive relief, which the Court of Chancery denied.  After the Court of Chancery and the Delaware Supreme Court denied an interlocutory appeal and the shareholders accepted AOL’s tender offer, the Plaintiff submitted a Second Amended Complaint asserting post-close claims (“Post-Close Action”) against the Millennial Board. 

Vice Chancellor Glasscock began his analysis by summarizing the different standards applied to pre-close and post-close claims.  Pre-close claims, when seeking preliminary injunction relief, require a plaintiff to “…demonstrate ‘a reasonable likelihood of proving that the alleged omission or misrepresentation is material.’”  Post-close claims, on the other hand, require a Plaintiff to “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.”  Where, as here, a corporation has a validly adopted § 12(b)(6) provision, a plaintiff must demonstrate post-close, “that a majority of the board was not disinterested or independent, or that the board was otherwise disloyal because it failed to act in good faith, in failing to make the material disclosure.”   

In the Post-Close Action, the Plaintiff sought “damages for breach of duty in regard to two alleged mal-disclosures.”  The Plaintiff alleged: (1) Millennial failed to fully disclose financial information, specifically the Unlevered, After-Tax Free Cash Flow Projections (“UFCF”); and (2) Millennial failed to fully disclose (and explain) the contingent fee arrangement of its financial advisor, LUMA Securities LLC.  “The Defendants move[d] to dismiss under…12(b)(6) for failure to state a claim.”

The Court found that the Plaintiff failed to meet its burden for both claims.  The Plaintiff’s first claim, insufficient disclosure of material financial information, had been subsumed in the Pre-Close Action, where the Court denied preliminary injunctive action.  In denying the Plaintiff’s request for a preliminary injunction, the court determined that the information was not material.  Vice-Chancellor Glasscock opined that “[e]ven if I were to find that the UFCF disclosures—contrary to my earlier determination on the record at the preliminary injunction hearing—constitute a material lack of disclosure, Plaintiff’s UFCU claim must fail.”  He continued, stating that “The Plaintiff has failed to plead facts such that it is reasonably conceivable the alleged incomplete disclosure was made by the board disloyally or in bad faith, as is required to sustain this claim post-close.”

The Court stated that, “[u]nder Delaware law, directors are presumed to be independent, disinterested, and faithful fiduciaries” and that the Plaintiff “does bear the burden to allege facts that rebut [that] presumption[,] that is, to demonstrate that it is reasonably conceivable that the board acted in bad faith or disloyally.”  Here, the Plaintiff relied on the Board’s accelerated vesting of stock options as evidence of disloyalty.  However, the court rejected this proposition, stating that “[i]t is well-settled that where the interests of directors and stockholders are aligned, as here, the accelerated vesting of options does not create a conflict of interest.”  The court held that the Plaintiff failed to sufficiently allege that a majority of the Millennial board was conflicted.

The Plaintiff’s second claim did not fare any better.  First, the court considered whether the Plaintiff’s second claim, incomplete disclosure of contingent fee agreements, should even be considered, or if the plaintiff had waived the claim.  The Plaintiff included the claim in his first complaint, but later abandoned it during subsequent proceedings.  The Court stated that, “where a plaintiff has a claim, pre-close, that a disclosure is either misleading or incomplete in a way that is material to stockholders, that claims should be brought pre-close, not post-close.”  The Court provided two reasons for pursuing such a claim pre-close, namely the stockholder’s right to a fully informed vote and potential damages.  “The preferred method for vindicating truly material disclosure claims is to bring them pre-close, at a time when the Court can insure an informed vote.”

Notwithstanding the issue of waiver, Vice-Chancellor Glasscock found that the Plaintiff’s second claim failed on the merits.  Here, Millennial disclosed in the proxy that LUMA Securities would “receive a fee of $3.6 million for its services, a substantial portion of which is contingent upon the completion of the merger.”  Plaintiff argued that “substantial portion” vaguely defined the substantial nature of the contingency and that such ambiguity supplied inadequate information for shareholders to vote.  The Court disagreed, stating that “[t]his Court has repeatedly held that such a disclosure regarding advisor fees, absent some indication that the fee was exorbitant or unusual, or otherwise improper, is sufficient.”  Here, the Plaintiff failed to allege that the fee was exorbitant, unusual, or otherwise improper.

Additionally, the Court found that the Plaintiff failed to allege that, even if the board’s disclosure of the advisor’s fee was insufficient, the board’s “allegedly incomplete disclosure was made in bad faith.”

The Court’s discussion throughout Nguyen provides a useful summary of the pleading requirements for both pre and post-claim disclosure violations.

John Brady is a Staff Member on the Delaware Journal of Corporate Law, and a member of the Moot Court Honor Society.  John works as a pre-trial clerk at the Chester County District Attorney’s office.

Suggested Citation: John Brady, Post-Close Disclosure Claims in Nguyen v. Barrett, Del. J. Corp. L. (Jan. 23, 2017), www.djcl.org/blog.

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