180 A.3d 1055
Del.2018Background
- Diamond Resorts’ board recommended a cash sale to Apollo via a two-step deal (front‑end tender offer; back‑end merger under §251(h)).
- Founder and Chair Stephen J. Cloobeck abstained from the board’s approval vote and told the board he opposed the sale because he was disappointed in the price and believed mismanagement made it the wrong time to sell.
- The Schedule 14D-9 disclosed that Cloobeck abstained and had not decided whether to tender his shares, but did not disclose his stated reasons for abstention.
- Cloobeck later tendered his ~15% stake; the merger closed once Apollo exceeded the 50% threshold.
- Plaintiffs sued alleging the 14D-9 omitted material information (Cloobeck’s reasons), and the Court of Chancery granted a motion to dismiss, finding the tender was fully informed and the omission immaterial.
- The Delaware Supreme Court reversed, holding Cloobeck’s reasons could be material and that omission rendered disclosures misleadingly incomplete, so dismissal was improper.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether omission of Cloobeck’s reasons for abstaining was material | Omission was material because a founder/Chairman’s contrary view would significantly alter the mix of information for stockholders deciding whether to tender or seek appraisal | Reasons for a director’s dissent/abstention are opinions and therefore immaterial as a matter of law | Reversed: such reasons can be material depending on context; omission here was material and misleadingly incomplete |
| Whether opinion‑fact distinction bars disclosure of a director’s stated belief | Plaintiffs: proxy statements routinely describe fiduciaries’ subjective reasons; those subjective reasons can be material | Defendants: Cloobeck’s view was mere opinion/puffery and not a factual omission requiring disclosure | Held: opinion-vs-fact label is not dispositive; subjective views can be material when they would affect reasonable investors’ decisions |
| Whether partial disclosure may be materially misleading | Plaintiffs: disclosing that Cloobeck abstained without his reasons presented an incomplete, distorted picture given board’s detailed reasons supporting the sale | Defendants: stockholders could infer Cloobeck merely had not decided whether to tender; no need to speculate | Held: partial disclosure that omits contradictory, salient reasons can be materially misleading; stockholders should not be forced to guess |
| Whether business judgment rule applied at pleading stage | Plaintiffs: incomplete disclosures preclude invocation of business judgment rule because stockholder vote was not fully informed | Defendants: dismissal was proper because tender was informed and business judgment rule should apply | Held: omission precluded business judgment protection at pleading stage; case remanded for further proceedings |
Key Cases Cited
- Corwin v. KKR Fin. Holdings LLC, 125 A.3d 304 (Del. 2015) (fully informed, uncoerced stockholder approval invokes the business judgment rule)
- Rosenblatt v. Getty Oil Co., 493 A.2d 929 (Del. 1985) (materiality standard: omitted fact likely to be important to reasonable shareholder; alters mix of information)
- TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438 (1976) (materiality defined by substantial likelihood that omitted fact would have been viewed by reasonable investor as having significantly altered total mix of information)
- Smith v. Van Gorkom, 488 A.2d 858 (Del. 1985) (board may not take neutral position and shift unadvised decision to stockholders; disclosure duties in major transactions)
- Newman v. Warren, 684 A.2d 1239 (Del. Ch. 1996) (cautioning against per se non‑disclosure rules but emphasizing full and candid disclosure of material facts)
- Walt Disney Co. Derivative Litigation, 731 A.2d 342 (Del. Ch. 1998) (partial disclosure that is materially misleading can constitute breach of disclosure duties)