The Materiality of Opinions: Appel v. Berkman

Colleen Degnan

In Appel v. Berkman, No. 316, 2017 (Del. Feb. 20, 2018) (hereinafter “Appel”), the Delaware Supreme Court reversed the Delaware Court of Chancery’s dismissal of a stockholder challenge to a two-step merger transaction. Plaintiff stockholders challenged the merger, claiming that they were misled by the proxy statement, which failed to disclose the founder and Chairman’s views regarding what he believed to be an inopportune time to sell the company. The Delaware Supreme Court concluded that the Chairman’s opinions were material, and their omission from the proxy statement misled stockholders when deciding to vote for the merger or to seek appraisal.

In 2007, Stephen J. Cloobeck founded Diamond Resorts (“the Company”) and served as the Chairman and CEO until the Company went public in 2013. Thereafter, he continued to serve as Chairman. In 2016, the Company began the public sales process and received notices of interest from five different parties, with the offers ranging from $23 to $33 per share.Later in the year, two more bids came in—one by Apollo for $30.25 per share and another bid for $27–$29 per share. The board of the Company voted for the sale to Apollo. However, Cloobeck did not participate in the vote. He reasoned that the mismanagement of the Company negatively affected the sale price, and therefore, it was not an opportune time to sell. His thoughts were conveyed in meeting minutes from two separate board meetings.

The board issued a Schedule 14D-9 Solicitation/Recommendation Statement to the stockholders in which they advocated for stockholders to sell their shares to Apollo. In the statement, the board noted that all of the directors voted in favor of the transaction, with the exception of the Company’s chairman, who abstained from the vote. While they noted that the Chairman abstained from the vote, and that he himself had not decided on whether to sell his own shares, they failed to include his reasoning.  In August 2016, the plaintiffs demanded the books and records of the Company. Soon after, Cloobeck sold his fifteen percent of shares. In turn, this meant that Apollo’s ownership now exceeded fifty percent, and they were able to approve the back-end merger without a stockholder vote.  After the deal closed, the plaintiff stockholders brought suit, and challenged the merger on the grounds that the board failed to disclose all material information to the stockholders regarding the tender offer, thus resulting in a lack of fairness.

The Delaware Court of Chancery took the view that the information was not material as a matter of law, and even if it was included in the disclosures, it would not have a significant effect. Defendants believed and argued that Cloobeck’s views were more of an opinion than a material fact, and that disclosure of his opinions was not required.  However, the Delaware Supreme Court disagreed with both views. First, the court discussed the fiduciary duty directors of Delaware corporations owe to their stockholders to deliver material information that would have a significant effect upon the stockholder’s decision-making process. Therefore, the court concluded that Cloobeck’s opinion, including his belief that it was not an appropriate time to sell the Company, required disclosure because his opinion of the transaction itself was a material fact.  Cloobeck was the founder and Chairman of the Company, and was held out to be an expert in the business having spent thirty years in the industry. Given his knowledge of the company and the industry as a whole, stockholders might have relied on his opinion when casting their vote to sell or seek appraisal.

The court reasoned that proxy statements are full of both facts and statements of opinion on those facts. They also contain opinions of advisors and reasoning why those advisors do or do not recommend certain transactions. The court noted that proxy statements, including the 14D-9 statement involved in the present case, contain subjective reasons for or against transactions. Specifically, in the 14D-9 issued by the board of the Company, there were several reasons why the board recommended stockholders to sell. The court noted that, because there were so many reasons why stockholders should tender their shares, any reasonable stockholder would be surprised to see the Chairman’s reasons as to why they should not. Therefore, the court concluded that the inclusion of information would “significantly alter the mix of information.”

The defendants relied on Newman v. Warren in support of their proposition that the reasoning behind a director’s dissent or abstention from a decision of the board is never material enough to require disclosure. The Delaware Supreme Court flatly disagreed. Instead, the court pointed out that the defendant’s line of thinking was in conflict with the principles of Delaware corporate law, which stand for the notion that stockholders should give weight to directors’ opinions because directors serve as fiduciaries on business matters. The court explained that it is not merely enough to tell stockholders what a board recommends, but must also include the board’s reasoning in order to provide the most information possible for the stockholders to make an informed decision. Additionally, the court noted that a director’s reasons for abstention or dissent might not always be material in nature, rather, it will depend on the facts of each individual case.

The court also pointed to case law from the Delaware Court of Chancery where the court held that the opinion of two key board members, stating that it was a bad time to sell their company, was material. The Delaware Supreme Court analogized Newman to Appel noting that Cloobeck himself was a “key board member” and his objection to the sale of the Company, due to mismanagement and the potential for a better selling price, was material in nature.

The defendants in Appel also believed that the stockholders could have assumed that the Chairman had reservations about the transaction solely because he abstained from voting and had not yet decided whether he was going to tender his own shares. However, the court emphasized that stockholders should not have to speculate. In fact, disclosures, under Delaware law are, by their very nature, required to provide stockholders the full story, and not mislead them, so that stockholders can make informed decisions when voting. By omitting information, the board of the Company did not fully disclose to the stockholders. The court believed that if the stockholders were misled and not fully informed, the 14D-9 was materially misleading.

The Delaware Supreme Court found it hard to believe that the omission was inadvertent and held that the omission was material in nature and should have been included. The court found that the omission precluded the business judgment rule standard at the pleading stage, and reversed and remanded back to the Delaware Court of Chancery to decide the case on the merits.

Colleen is a 2L staff member on the Delaware Journal of Corporate Law and was recently appointed as next year’s Internal Managing Editor.

Suggested Citation: Colleen Degnan, The Materiality of Opinions: Appel v. Berkman, Del. J. Corp. L. (May. 4, 2018), www.djcl.org/blog.

This entry was posted in djcl. Bookmark the permalink.