Delaware Chancery Preliminarily Enjoins Merger-Related Stockholder Meeting Until Financial Advisor’s Fees For Merger-Related Financing Are Disclosed
On March 22, 2017, Chancellor Andre G. Bouchard of the Delaware Court of Chancery preliminarily enjoined a stockholder vote on the proposed acquisition by Consolidated Communications Holdings, Inc. (“Consolidated”) of FairPoint Communications, Inc. (“FairPoint”). Vento v. Curry, C.A. No. 2017-0157-AGB (Del. Ch. Mar. 22, 2017). Plaintiff, a Consolidated stockholder, alleged that the Consolidated board of directors breached their fiduciary duties by failing to adequately disclose the financial interests of Consolidated’s financial advisor in the transaction and sought to enjoin the vote pending distribution of corrected disclosures. The Court agreed that the disclosure was inadequate and delayed the vote until five days after Consolidated disclosed the amount of the advisor’s fees.
On December 3, 2016, Consolidated and FairPoint entered into an agreement for a stock-for-stock merger, which is expected to close in mid-2017. An affiliate of Consolidated’s only financial advisor committed to provide 40% of $935 million in debt financing for the merger. Although the proxy statement disclosed that the advisor was also participating in the financing, the proxy allegedly did not clearly disclose the fees that the advisor stood to earn in connection with the financing. Plaintiff filed suit on March 3, 2017 but waited until March 14, 2017—just two weeks before the March 28, 2017 stockholder vote—to move for a preliminary injunction, a delay for which the Court chastised plaintiff’s counsel.
The Court found that the allegedly general disclosure that the advisor’s affiliate would receive financing fees was inadequate. In so holding, the Court emphasized that under Delaware law investment bank compensation and events that could create potential conflicts of interest should be fully disclosed because of investment banks’ central role in mergers. The Court found that the financing fees could potentially incentivize the advisor to issue a fairness opinion and, because the amount of the fees was both material and quantifiable, it should be more clearly disclosed. The Court rejected defendants’ arguments that the fees could be determined from the existing disclosures, reminding the parties that “buried facts” are not adequate disclosures and observing that “[a] stockholder should not have to go on a scavenger hunt to try to obtain a complete and accurate picture of a financial advisor’s financial interests in a transaction.” Accordingly, the Court issued a preliminary injunction delaying the stockholder vote until five days after Consolidated corrects the disclosure deficiency.