Delaware Courts, Mergers, and Free "Legal Advice"

A nice student post by Bill Garehime on In re Checkfree Corp. Shareholders Litigation, is a Delaware Chancery Court opinion addressing disclosure issues in connection with a planned merger.  The case warrants some observations, mostly because of the glib handling of an important disclosure issue. 

The complaint was filed in August 2007 and requested that the court enjoin the pending merger.  Among other arguments, plaintiffs contended that the proxy material was incomplete, having omitted mention that the merger would extinguish a derivative suit involving the directors of the Company.  In other words, the fact raised the possibility that the merger was approved not because it was in the best interests of shareholders but because it eliminated liability.  According to the complaint, the proxy statement referenced the litigation but said nothing about the impact of the merger on the litigation.

Chancellor Chandler noted that "directors need not tell shareholders that a merger will extinguish pending derivative claims."  His authority?  A case concluding that "there is no obligation to supply investors with legal advice."  He cited the case as direct authority, without preceding it with some type of notation suggesting that it was not exactly on point.  It was, however, inaccurate to assert that plaintiffs were seeking something akin to legal advice.  Instead, they were asking to have disclosed information that suggested a possible alternative motivation for the merger.  Indeed, the operative paragraph in the complaint also noted that the directors had received indemnification from liability "occurring or alleged to have occurred before the completion of the Merger."  In other words, the court knew that this wasn't about legal advice but conflicts of interest.  

As part of the analysis, Chancellor Chandler noted that enjoining the merger "would impose significant costs on the shareholders of CheckFree in the form of the lost time value of money and lost opportunity costs."  This is true and ought to be weighed in the decision making process.  Nonetheless, plaintiffs contentions could have been resolved through additional disclosure rather than delay in the merger.  The merger only had to be delayed because, by the time the court got around to hearing the case (October 18), see CheckFree, n. 1, the merger was five days later.  In other words, had the court heard the case sooner, the appropriate remedy would have been additional disclosure which could have been accomplished without delaying the merger. 

Instead, the court was forced to conclude that the information was immaterial, a highly debatable proposition.  The conflict likely was important to reasonable investors and, in any event, disclosure of the existence of the derivative suit was materially incomplete without mentioning that the merger would make the suit go away.