Appel v. Berkman
180 A.3d 1055 (2018)
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Rule of Law:
A board of directors has a fiduciary duty to disclose the specific reasons for a key director's abstention or dissent on a merger vote when that director's views are material and contradict the board's recommendation, as omitting such information can render the disclosure to stockholders materially misleading.
Facts:
- Stephen J. Cloobeck founded Diamond Resorts International in 2007 and served as its Chairman at the time of the events in question.
- In its own proxy materials, the Diamond Resorts board described Cloobeck as having a 'unique understanding' and 'in-depth knowledge' of the company.
- In February 2016, the board initiated a process to review 'strategic alternatives,' which led to a public sales process.
- Apollo Global Management made a bid to acquire the company for $30.25 per share.
- On June 26, 2016, the Diamond Resorts board voted to approve the sale to Apollo.
- Cloobeck abstained from the board vote, stating his reasons in two board meetings.
- Cloobeck's stated reasons for abstaining were that he was 'disappointed with the price and the Company's management for not having run the business in a manner that would command a higher price, and that in his view, it was not the right time to sell the Company.'
- The board issued a Schedule 14D-9 Solicitation/Recommendation Statement to stockholders, which recommended the sale but did not disclose Cloobeck's specific reasons for abstaining, stating only that he had abstained.
Procedural Posture:
- Plaintiffs, stockholders of Diamond Resorts International, filed a class action complaint against the company's board of directors in the Delaware Court of Chancery (trial court).
- The complaint alleged, among other things, a breach of the fiduciary duty of disclosure related to the merger with Apollo Global Management.
- The defendants filed a motion to dismiss the plaintiffs' claims.
- The Court of Chancery granted the motion to dismiss, holding that the chairman's reasons for abstaining were immaterial as a matter of law.
- The plaintiffs (appellants) appealed the Court of Chancery's dismissal to the Delaware Supreme Court (highest court).
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Issue:
Does a board of directors breach its fiduciary duty of disclosure by omitting from a solicitation statement the specific reasons a key director, such as the company's founder and chairman, gave for abstaining from a vote to approve a merger, when those reasons contradict the board's recommendation to shareholders?
Opinions:
Majority - Chief Justice Strine
Yes, the board breached its fiduciary duty of disclosure. The reasons for a key director's dissent or abstention from a merger vote can be material facts that must be disclosed to shareholders. The court rejected the defendants' argument that a director's reasons for dissent can never be material, holding instead that a contextual analysis is required. Information is material if there is a substantial likelihood a reasonable shareholder would consider it important in deciding how to vote. Here, Cloobeck was not just any director; he was the company's founder, former CEO, and Chairman, whose expertise was touted by the board itself. His stated reasons for abstaining—that poor management led to a disappointing price and it was the wrong time to sell—were in direct conflict with the board's recommendation and the rosy picture it presented. Disclosing that he abstained without explaining why created a misleadingly incomplete narrative. Citing Gilmartin v. Adobe Resources Corporation, the court concluded that the omission of a key executive's negative view on the timing of a sale significantly altered the total mix of information available to stockholders.
Analysis:
This decision clarifies and strengthens the fiduciary duty of disclosure under Delaware law, rejecting a per se rule that directors' reasons for dissenting are immaterial. It emphasizes that context is critical in determining materiality, particularly the identity of the director and the substance of their disagreement. The ruling pushes boards toward greater transparency regarding internal conflicts on fundamental transactions, preventing them from presenting an 'airbrushed' image of unanimity. Going forward, boards must carefully consider whether the substance of a director's dissent is material and necessary to provide stockholders with a balanced and truthful account, especially when the dissenting director has unique expertise or credibility.
