Delaware Supreme Court Affirms Dismissal Of Disclosure Claim Based On Subsequent Employment Of Special Committee Chair By Legal Counsel That Advised Committee
On June 15, 2017, the Supreme Court of Delaware affirmed dismissal of a putative stockholder class action alleging breach of fiduciary duty by the directors of Blount International, Inc. (“Blount”) and aiding and abetting claims against other defendants, including Blount’s financial advisor, following Blount’s acquisition by a buyout group consisting of Blount’s CEO and COO, who are also board members, and several entities. Chester Cty. Ret. Sys. v. Collins, No. 603, 2016 (Del. June 15, 2017). Plaintiffs claimed that the proxy statement was materially misleading because it failed to disclose inter alia that the special committee chairman would become a partner at the law firm advising the committee shortly after closing. Although Chief Justice Strine, writing for the Court, observed that “prudence would seem to have counseled for bringing  to light earlier” the chairman’s impending partnership, the Court agreed with the decision of the Delaware Court of Chancery in Chester Cty. Ret. Sys. v. Collins, 2016 WL 7117924 (Del. Ch. Dec. 6, 2016), that this and the other omissions were immaterial and affirmed the dismissal.
Blount’s special committee, comprising four non-management directors, recommended to the board a proposed management-cash-buyout agreement. On March 9, 2016, Blount filed a definitive proxy statement and thereafter filed supplemental disclosures. At the stockholder meeting on April 7, 2016, more than 75% of Blount’s outstanding shares and 71% of the disinterested shares were cast in favor of the merger. Plaintiffs subsequently sued, alleging that various inadequate disclosures constituted breaches of fiduciary duty and argued that the omissions nullified the cleansing effect under Corwin v. KKR Financial Holdings LLC, 125 A.3d 304 (Del. 2015), of the stockholder approval such that the entire fairness of the transaction should be reviewed.
The Chancery Court held that none of the alleged omissions were material and that the connection with outside counsel had not compromised the committee chairman’s independence. The Court agreed, but observed that the post-closing disclosure of the chairman’s future employment with the firm “raised needless questions” that could have been avoided by earlier disclosure since the director’s employment at the firm was “at least under serious consideration, if not already agreed upon,” before the closing.
The Court’s commentary serves as a reminder that perceived conflicts of interest related to an existing relationship with an outside advisor—including legal counsel—may become a stockholder suit. The decision also reminds parties to a transaction that the cleansing protections of stockholder approval under Corwin extend only so far as the adequacy of the disclosures on which the stockholders relied.