Delaware Supreme Court Reverses Court of Chancery’s Dismissal Under Corwin

Skadden, Arps, Slate, Meagher & Flom LLP

Appel v. Berkman, No. 316, 2017 (Del. Feb. 20, 2018)

The Delaware Supreme Court reversed and remanded a Court of Chancery dismissal under the Corwin doctrine, holding that stockholders were not fully informed in approving the challenged transaction because the proxy statement contained “materially misleading” disclosures.

The action arose from a stockholder challenge to Diamond Resorts International’s two-step merger with Apollo Global Management. In 2016, Diamond Resorts engaged in a “public sales process” that resulted in indications of interest from several parties, and ultimately two bids. The Diamond Resorts board voted in favor of Apollo’s bid; however, the company’s founder and former CEO abstained from that vote and in two board meetings stated “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 proxy did not identify why he abstained from approving the merger.

In the case below, the Court of Chancery dismissed the action under Corwin, finding that the merger had been approved by a fully informed, uncoerced stockholder vote. The “sole issue” on appeal was whether the stockholder’s approval of the transaction was in fact “fully informed” given that the proxy did not identify the Diamond Resorts founder’s reasons for abstaining.

The Delaware Supreme Court found that the failure to disclose this information was sufficient to plead a claim that the proxy materially was misleading, explaining that the founder was a “‘key board member’ if ever there were one,” his objections to the sale were clearly and concisely documented in board minutes, and such “views regarding the wisdom of selling the company were ones that reasonable stockholders would have found material in deciding whether to vote for the merger or seek appraisal.” The Supreme Court therefore reversed the Court of Chancery’s dismissal because, as a pleading matter, the failure to disclose this information stated a claim that the proxy was materially misleading and the stockholder vote uninformed.

This summary can be found in the June 2018 issue of Inside the Courts.