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This article was published in Law360 on July 20, 2018. © Copyright 2018, Portfolio Media, Inc., publisher of Law360. It is republished here with permission. This article was published on August 8, 2018 in the Harvard Law School Forum on Corporate Governance and Financial Regulation blog.
A recent Delaware Court of Chancery opinion serves as a stark reminder of the information that must be included in appraisal notices delivered pursuant to Section 262 of the Delaware General Corporation Law. As explained in the opinion, merely providing notice of a merger and the existence of appraisal rights is not sufficient. Rather, appraisal notices must provide stockholders with the information they need to determine whether to accept the merger consideration or to seek appraisal. More specifically, appraisal notices should include information regarding (1) the background and terms of the merger, (2) the value of the constituent corporations, (3) the board’s decision-making process, and (4) potential conflicts of interest.
Cirillo Family Trust v. Moezinia1 arose out of Endo Pharmaceuticals’ acquisition of DAVA Pharmaceuticals, a New Jersey-based pharmaceutical manufacturer. Under the merger agreement, DAVA’s stockholders were entitled to receive, in the aggregate, up to $600 million in consideration, comprising $575 million in cash at the closing and contingent payments of up to $25 million. Consummation of the merger required stockholder approval. To obtain this approval, DAVA, at its counsel’s recommendation, sought and obtained written consents from 99.73 percent of DAVA’s stockholders. There was one holdout stockholder — the Cirillo Family Trust.
After it became clear that Cirillo would not consent, DAVA sent it an appraisal notice. The notice apparently mimicked one of its counsel’s precedent forms. The notice informed Cirillo that the merger had been approved by written consent and that Cirillo had the right to seek appraisal within 20 days. It also included a letter of transmittal in the event that Cirillo elected to accept the merger consideration. The notice did not include any of DAVA’s financial information, any description of DAVA’s business or its future prospects, or any information about how the merger price was determined or whether the price was fair to stockholders. Cirillo sued DAVA’s directors, claiming that they breached their fiduciary duties on the basis that the appraisal notice was deficient. The directors of DAVA moved for summary judgment, arguing, among other things, that they acted in good faith and established a reasonable reliance defense pursuant to Section 141(e) of the DGCL.
The Court’s Analysis
In analyzing the directors’ summary judgment motion, the court first determined whether the appraisal notice was defective, and then determined whether the directors breached their fiduciary duties on that basis. The court agreed with Cirillo that the notice was in fact deficient. The court stated that “the Notice was totally bereft of information required under Delaware law to permit a stockholder to decide whether to seek appraisal in lieu of accepting the Merger consideration.” The court so held because the notice did not contain or refer to any of DAVA’s financial information, any description of DAVA’s business or its future prospects, or any information about how the merger price was determined or whether the price was fair to stockholders.
That determination did not end the court’s inquiry, however. As stated by the court, “[t]he relevant inquiry ... is not whether the Notice was legally deficient (it clearly was), but whether the Director Defendants acted in bad faith with respect to the preparation of the Notice and the disclosures it contained.” Ultimately, the court concluded that DAVA’s directors did not. Placing the blame on DAVA’s counsel, the court stated that “[n]othing in the record suggests that the Director Defendants knew or should have known that [their counsel] was not competent to prepare the Notice or that its legal advice concerning the contents of the Notice would end up being so erroneous.” Based on that finding, the court held that DAVA’s directors “reasonably relied upon DAVA’s longtime outside corporate counsel to prepare the Notice,” which precluded a finding of bad faith and conclusively established the directors’ reasonable reliance defense pursuant to Section 141(e).
Though the directors of DAVA were found not to have breached their fiduciary duties, the court’s decision serves as an important reminder of both the required contents of an appraisal notice as well as the appropriate approach to take when communicating with stockholders. The decision also cautions directors against relying on firm forms. Further, it suggests that reviewing a statute may not be enough to determine the required contents of a notice.
Indeed, Section 262(d)(2) of the DGCL states that an appraisal notice “shall notify [the stockholders] who are entitled to appraisal rights  of the approval of the merger or consolidation[,] ...  that appraisal rights are available ...,  shall include ... a copy of this section[,] ... and  if given on or after the effective date of the merger or consolidation, [shall set forth the] effective date of the merger or consolidation.”
Per the plain language of Section 262(d)(2), DAVA’s appraisal notice arguably satisfied its statutory obligations. But Delaware case law makes clear that more is required; the notice must provide stockholders with sufficient information to enable them to determine whether to accept the merger consideration or to seek appraisal. More specifically, per Delaware case law, an appraisal notice should include information regarding:
Numerous Delaware decisions have required these four items in appraisal notices.2
As noted above, in addition to serving as a reminder to boards of directors about the required contents of appraisal notices, this decision also provides useful guidance on the appropriate approach to take when communicating with stockholders. Per that guidance, to ensure communications with stockholders, such as appraisal notices, are legally sufficient and to avoid becoming subject to litigation over the contents of these communications and notices, boards of directors should retain experienced counsel, particularly with in-depth knowledge of Delaware law where applicable, avoid relying solely on stock language and forms used in precedent transactions, and consult case law in addition to any statutory language on point. Doing so will not only help to stave off potential deal litigation, but also make the directors’ legal position more defensible should litigation arise.
1 Cirillo Family Trust v. Moezinia, No. 10116-CB.
2 See e.g., Skeen v. Jo-Ann Stores Inc., 750 A.2d 1170, 1174 (Del. 2000) (“[A] stockholder deciding whether to seek appraisal should be given financial information about the company that will be material to that decision.”); Gilliland v. Motorola Inc., 859 A.2d 80, 88 (Del. Ch. 2004) (“[N]otice given pursuant to section 262 must contain, at a minimum, summary financial and trading data and reference to the publicly available sources from which more complete information is available.”); Nagy v. Bistricer, 770 A.2d 43, 51 (Del. Ch. 2000) (finding that the directors breached their duty of disclosure where a post-transaction information statement contained no information regarding the value of the constituent corporations, the reasons why the board supported the transaction, the directors’ decision-making process in supporting the transaction, or the directors’ interest in the acquirer); Turner v. Bernstein, 776 A.2d 530, 535 (Del. Ch. 2000) (finding that the directors breached their duty of disclosure where the stockholders “did not even receive the company’s most recent financial results for the periods proximate to the vote,” “any projections of future company performance,” or “any explanation of why the  board believed that the merger consideration was more worthwhile to the stockholders than the returns that could be expected if the company were to pursue its existing business plan”).
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