Berger v. Pubco: What does Pubco tell us about the larger arc of the fiduciary duty of disclosure?

The Delaware courts have long wrestled with the Fiduciary Duty of Disclosure (FDD), though its roots, and its relevance to controllers, date back (as a “duty of complete candor”) to 1978 with the Supremes’ Lynch v. Vickers Energy decision. Out of concern for staying out of the Feds’ way, in 1997 then Vice Chancellor (now Chief Justice) Steele in essence sought to kill off the FDD with his ruling in Malone v Brincat: that even knowing misrepresentation of earnings by a board would not constitute a fiduciary breach. The Supreme Court, sensing a public relations disaster and the end of any plausible meaning to the concept of fiduciary duties in Delaware’s corporate law, reversed en banc in a decision which is largely of hortatory import. (Back in 2000 I wrote about Malone’s seminal relevance in The Georgia Law Review, and Justice Jacobs expressed his views of the continued importance of fiduciary disclosure doctrine in a speech available at 2 J. Bus. & Tech. L. 391 (2007)).

But even Congress, in the Securities Litigation Uniform Standards Act, thought better of preempting Delaware’s disclosure doctrine, and though the doctrine is sometimes downplayed as a mere subspecification of the duty of care (as negligent oversight of reporting) or loyalty (...lying to facilitate self-dealing is clearly a loyalty breach), the fiduciary duty of disclosure has a life of its own – and an increasingly rich one at that. Fiduciary disclosure doctrine reflects certain Delaware judges’ instinct that corporate law has a vital role to play in asserting checks and balances on the statutory authority delegated to directors, officers and shareholders (and controllers and minorities). It’s part of the strain in Delaware’s corporate case law that presumes there’s real governance in corporate governance and transacting -- that there are genuine principles at stake irreducible to dollars and cents. In this regard, the fiduciary duty of disclosure is an independent off-shoot of the duty of fair dealings prong of the Entire Fairness standard.

Finally, although it has too often been slighted or maligned by the courts, the FDD has been good to Delaware, especially as applied in M&A disputes. It has represented a growth industry for Delaware -- terrain where Delaware’s brand of detailed but flexible corporate law can hold its own against encroaching, de facto preemption, and can add value for investors. Nevertheless, until quite recently, the FDD did not look so promising.  It mostly constituted a doctrinal rationale for Delaware to address what in essence were federally mandated disclosure obligations and to resolve them alongside the fiduciary/transactional issues which constitute Delaware’s core strength. (Compare this to having the federal courts adjudicate the fiduciary standards relevant to M&A transactions as supplemental claims arising under federal securities law ones – many problems there).

Nevertheless, the growth in the FDD was glacial, for at least two reasons. First, consistent with the Supremes’ decision in Malone, pleadings and remedies problems made FDD claims by holders problematic, even before the feds’ ruled these claims were preempted in Dabit. Second, in these past twenty years, Delaware did not relish expanding its rules of decision in ways that might increase shareholder litigation. In interpreting the FDD, the Delaware courts had declined to expand the occasions or content of disclosure to shareholders, or the definition of materiality beyond the applicable federal standards. The federal securities laws’ standards were simply subsumed into Delaware’s fiduciary jurisprudence.

For a variety of reasons, this is changing in the post-SOX era. Delaware is now willing to amplify the substance of the disclosure required, under the rubric of the FDD, beyond that which is formally mandated by federal law. A notable example is Vice Chancellor Strine’s (October) 2002 ruling in Pure Resources, where the court held a 14d-9 deficient for its omission of a fair summary of the substantive analysis performed by the Special Committee’s investment advisors. The increasing importance of the FDD in transactional settings is evident also in the Topps, Lear and Netsmart decisions from 2007, and Transkaryotic Therapies, from 2008. At least in the M&A context, Delaware is now willing to surpass the enumerated federal disclosure items. As Delaware’s transactional choreography for M&A continues to evolve, the scope, timing and remedies attaching to these disclosure duties will too. Pubco is an example of this, in the context of a firm where the federal disclosure mandates were inapplicable.