Professor Bainbridge...on law, politics, religion, culture & food

Remedies under Delaware State Law for Breaches of the Duty of Disclosure

The other day, I noted Chancellor William Chandler’s recent decision in Transkaryotic Therapies, in which he granted summary judgment to defendants with respect to a claim arising out of the so-called fiduciary duty of disclosure on grounds that too much time had lapsed since the vote allegedly affected by the disclosure violations:

The solicitation of proxies for the shareholder vote approving the merger of Shire and Transkaryotic occurred over three years ago. The merger has happened; “the metaphorical merger eggs have been scrambled.” An injunctive order requiring supplemental, corrective disclosures at this stage would be an exercise in futility and frivolity. Indeed, there are no longer shareholders of Transkaryotic from whom to solicit proxies.

I observed that:

This makes sense to me. The point of a fiduciary duty of disclosure ought to be limtied to ex ante remedies designed to ensure that the corporate governance mechanisms under state law are validly followed. As a practical matter, ex post relief long after the transaction in question has been effected is more properly the province of federal proxy litigation. As a legal matter, such a claim might well not fall within the scope of the Delaware exemption to the PSLRA/SLUSA regime.

In Wayne County Employees’ Retirement System v, Corti (HT: Pileggi), Chandler elaborates on why he thinks ex ante relief is generally the preferred state law solution:

A preliminary injunction motion is, however, the appropriate mechanism by which to challenge alleged disclosure violations. The right at issue in this case and in all disclosure cases is “the right to receive fair disclosure of the material facts necessary to cast a fully informed vote,” and that right, if infringed, can only be truly remedied by a specific, injunctive order mandating the appropriate disclosure before the shareholders are required to vote.

Will you see the case in our casebook? I’ve run it up the flag pole to see if Bill or Mark salutes. The facts are sort of sexy, in that they involve a merger of a video game company (Activision), which is always a plus in our book. We like good facts. The statement of the law is concise, which we also like a lot. Finally, there’s a detailed application of the law to the facts, which we really like.

On the other hand, while Transkaryotic Therapies had to much law for our purposes, this case may have too little. There’s no discussion of Lynch or Malone or any of the other cases that would put the duty of disclosure in historical conext; nor any discussion of the parameters of that duty. If only we could get Chandler to edit down the historical section of Transkaryotic and include it here.

Plus, I’m afraid that the opening and closing paragraphs of the opinion are just too far over the top on the cuteness scale:

World of Warcraft, the market-leading massively multiplayer online role playing game, entices millions of paying subscribers to immerse themselves in a virtual online world. These subscribers create their own characters, and through these avatars they interact with other players, develop skills, create a unique jargon, join guilds and alliances, engage in battles, and embark on quests. . . . In some ways, perhaps, the world of Mergers and Acquisitions is a massively multiplayer role playing game as well. Like in World of Warcraft and other games, the participants in the M&A field take on certain roles, interact in their own community, hone specialized skills, and even develop a unique, somewhat curious vernacular. One particular quest in the world of M&A is disclosure litigation. In the instance of disclosure litigation presently pending before this Court, the world of M&A meets the World of Warcraft. ...

In the role-playing game that is this disclosure litigation, both sides have played their respective roles well. ... Like any game, this one has rules, and the most essential rule of disclosure is materiality. Because the plaintiff could not establish the materiality of its final three disclosure claims, the motion for a preliminary injunction is denied. . . .GAME OVER.

A plus or a minus?