DE Court Refuses to Enjoin Stockholder Vote for Alleged Disclosure Violations

This question was most recently addressed by the Court of Chancery in a bench opinion delivered by Vice Chancellor Donald Parsons in November, in Dent v. Ramtron International Corporation, Civil Action No. 7950-VCP (Del. Ch. Nov. 19, 2012). In denying injunctive relief to a stockholder seeking to delay a stockholder vote on a second-step merger on the basis of inadequate disclosure regarding management financial projections, the Vice Chancellor provided a thoughtful analysis of the relevant issues and precedent.

Background

Ramtron International Corporation is engaged in the manufacture of specialty semiconductor products. In June 2012, Ramtron was faced with a hostile takeover attempt by the much larger technology company, Cypress Semiconductor Corporation, which offered $2.48 in cash for each outstanding Ramtron share. Ramtron's board, armed with the advice of its financial adviser, Needham & Company, rejected this offer as inadequate and commenced a process to “explore strategic alternatives.” While Needham conducted a process in which a number of potential buyers were contacted, Cypress and Ramtrom made various offers and counter-offers. Cypress decided it could proceed with its offer without signing a confidentiality agreement and reviewing non-public information of Ramtron, including management projections, which Cypress believed were “inherently unreliable given both the nature of the industry and Ramtron's record of missing three of the last four years of its own earnings guidance.”

On Aug. 27, Cypress raised its offer to $2.88 per share, to which Ramtron countered on Sept.13 with a price of $3.50. The back-and-forth continued through mid-September, when Cypress finally offered and Ramtron accepted a price of $3.10. Ramtron's decision was supported by a fairness opinion delivered to its board. The acquisition was structured as a two-step transaction, a cash tender offer by Cypress at $3.10 per share conditioned on receipt of a majority of outstanding Ramtron shares, followed by a merger to acquire the remaining shares at the tender offer price.

Because tenders were received from stockholders owning only 78% of the outstanding shares, Ramtron was forced to conduct the second step as a long-form merger in which a Ramtron stockholder vote was required (although the result was pre-ordained given Cypress's 78% stake and its commitment in the merger agreement with Ramtron to vote in favor of the merger). It should also be noted that Cypress did negotiate for a top-up right allowing it to purchase additional shares from Ramtron in order to obtain 90% of the outstanding shares and thereby obviating the need for a stockholder vote under Delaware's short-form merger statute, but Cypress was not allowed to trigger that right unless at least 86% of the outstanding shares were tendered.

Prior to the stockholders' meeting scheduled for Nov. 20 to vote on the merger, Ramtron stockholder Paul Dent commenced a class action lawsuit in the Delaware Court of Chancery, and asked the court to preliminarily enjoin the meeting on the ground that the Ramtron board breached its “fiduciary duty of candor” by failing “to provide sufficient disclosures to allow the company's stockholders to make an informed decision on whether to vote in favor of the merger or, instead, to seek appraisal.” At the heart of Dent's action was his claim that Ramtron failed to disclose management financial projections in its proxy materials that had been provided to Needham in connection with its fairness analysis. Needham used these projections in calculating a discounted cash flow (DCF) analysis yielding an implied value for each Ramtron share ranging from $3.57 to $5.01, well in excess of the price agreed to by Cypress and Ramtron.

The Ramtron board offered several counter-arguments to rebut Dent's allegations, including that:

• Management's projections are “neither accurate nor reliable,” so to include them “would create a greater risk of confusing Ramtron's stockholders than informing them on whether to accept the $3.10 offer price or to seek appraisal.”
• Cypress refused to even look at the projections, characterizing them as “inherently unreliable.”
• Needham's DCF analysis is disclosed in the proxy materials in rather great detail, “conspicuously” demonstrating that the merger price is well below the range of value yielded by the DCF analysis.
• No other bidders had emerged during the process conducted by Needham, despite the publicity generated by Cypress's public hostile tender offer.

The 'Duty of Disclosure'

The Chancery Court began its analysis by noting that to prevail on his motion for a preliminary injunction, plaintiff must, among other things, “prove ' that he has a reasonable probability of success in demonstrating that the failure to disclose these projections constitutes a breach of the board's duty of disclosure.” The court explained that this “duty of disclosure” is actually “a specific application of corporate directors' fiduciary duties of care and loyalty,” which “requires directors to disclose fully and fairly all material information within the board's control when it seeks shareholder action” [emphasis added]. Because the business judgment rule is not applicable in the “shareholder voting context,” rather than “defer[ring] to directors' judgment about what information is material,” the court “determines materiality for itself from the record at the particular stage of the case when the issue arises.”

When the key issue is the materiality of an omitted disclosure, the court explained that “[a]n omitted fact is material if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote.” Moreover, “[a]n omitted fact that otherwise might not be material may become material where the omission renders the partially disclosed information materially misleading.” “Once defendants travel down the road of partial disclosure,” the court noted, “they have an obligation to provide stockholders with an accurate, full, and fair characterization of whatever they disclose.” On the other hand, “Delaware law does not require the disclosure of inherently unreliable or speculative information which would tend to confuse stockholders or inundate them with an overload of information.”

Materiality of Projections

Having established the appropriate standard of review, the court next turned to the question of whether financial projection in general, or the omitted Ramtron projections in particular, are material and need to be disclosed to stockholders asked to vote on a merger. First, the court made it clear that “There is no per se duty to disclose financial projections furnished to and relied upon by an investment banker.” Accordingly, the materiality of any particular financial projections must be decided “in the context of the specific case.”

With regard to the Ramtron management projections, the court found “no facts suggesting that the undisclosed information is inconsistent with, or otherwise significantly differs from, the disclosed information.” As such, “the evidence demonstrates that the projections are not material.” The court cited a number of factors in support of this conclusion:

• The other analyses prepared by Needham ' a selected company analysis, a selected transaction analysis and a stock price premium analysis ' all “indicate that a merger at $3.10 is within a reasonable range, if not on the high side of a reasonable range of merger prices,” making the DCF analysis something of an outlier.
• The proxy statement states that Needham's DCF analysis was “based on Ramtron's management's forecasts,” leading to the “reasonable inference ' that management's projections are relatively optimistic, but were considered by ' the board, and Needham.”
• Despite Ramtron's attempts to convince Cypress to pay $3.50, at the bottom of the DCF range, Cypress would agree to pay no more than $3.10.
• Previous Delaware cases in which projections were found to be “material” contain “factual distinctions” compelling a different result here.
• “[N]o other company expressed interest in buying Ramtron at any price,” despite a serious marketing effort by Needham and Cypress's public bid.
• “[O]thers in the industry, including Cypress ' and one of the few analysts covering Ramtron recently ' have expressed skepticism about the accuracy of forecasts in this industry ' and by Ramtron's management, in particular.”
• Expert testimony revealed that “between October 2011 and June 2012, Ramtron repeatedly failed to achieve its public guidance and also its internal projections.”

Based on its analysis of these various factors, the court concluded that, in the case of the Ramtron management projections, “materiality ' does not turn on whether those projections were reliable or unreliable. Instead, the question is whether there is ' 'a substantial likelihood that the undisclosed information would significantly alter the total mix of information already provided.'” Applying that traditional Delaware standard for disclosure issues, the court found “it is unlikely that a reasonable [Ramtron] stockholder would find the projections to be important as opposed to merely helpful in deciding how to vote on the merger or whether to seek appraisal.” In the court's opinion, “[b]ased on the entirety of the proxy, it appears that defendants have provided stockholders with the information they need to make an informed vote.” It should also be noted that while not key to its ruling on materiality, the court did find that Cypress had completed its tender offer, thus assuring completion of the second step, and expressed the concern that “[e]njoining the stockholder vote ' would delay Cypress's ability to exercise control over Ramtron's business and operations at a time when the company is performing below expectations and may face some level of distress.”

Conclusion

Although the Court of Chancery's opinion in Dent v. Ramtron International Corporation does not really break any new ground, it does provide an excellent overview of how the Delaware courts approach disclosure issues in general, and arguments over the need to provide management projections to stockholders when voting on a fundamental corporate transaction in particular. Plaintiffs seeking to preliminary enjoin a stockholder vote face a difficult burden in any event, and a stockholder seeking to compel disclosure of management projections in proxy materials needs to assert compelling evidence why, as the Ramtron court stated, inclusion would be “important as opposed to merely helpful” to the other stockholders. Generally speaking, absent extraordinary factors in any given case, the disclosure requirements of the SEC and current market practice related to management projections should suffice.

Robert S. Reder has been serving as a consulting attorney at Milbank, Tweed, Hadley & McCloy LLP since his retirement as a partner in April 2011. A member of this newsletter's Board of Editors, Reder also is serving as an Adjunct Professor at Vanderbilt Law School and at Fordham Law School.

Mergers & Acquisitions (M&A) practitioners frequently face the vexing issue of whether to include target company financial projections, usually prepared by management but on occasion by outside advisers, in stockholder solicitation materials. This decision often depends not only on whether such projections were furnished to directors, bidders and/or financial advisers, but also on the quality of the projections. Further, it is not unusual to have multiple projections prepared at different times and furnished to different parties for different reasons (i.e., to bidders to induce a higher offer price, to directors to help them assess the company's performance and prospects, and to financial advisers in connection with their fairness analysis of deal terms).

The rules of the Securities and Exchange Commission (SEC) do not squarely address this issue, leaving it to legal counsel to help the disclosing company make the decision on whether or not to disclose projections. Generally, full projections furnished to the acquiring company are included in tender offer disclosure materials when a tender offer is utilized as the first step in a negotiated two-step transaction. In the case of proxy materials used to solicit stockholder votes in a one-step merger transaction, key line items from projections furnished to the target's financial adviser in connection with its fairness analysis often are included in the proxy statement. Sometimes, if more than one set of projections is available (for instance, management-prepared projections and financial adviser-prepared projections) and they are not consistent, both are included or at least referenced.

The Delaware Court of Chancery has frequently faced the question of whether financial projections were required to be included in stockholder disclosure materials in the context of claims that directors breached their fiduciary duty of disclosure. Simply speaking, this is a duty to provide stockholders with disclosure of all information material to their decisions on how to vote on a fundamental issue, such as a business combination transaction. This is essentially a fact-based analysis, but there are relevant legal principles developed by the court to help legal counsel assist their clients in deciding whether or not disclosure of financial projections is required in any particular case.

This question was most recently addressed by the Court of Chancery in a bench opinion delivered by Vice Chancellor Donald Parsons in November, in Dent v. Ramtron International Corporation, Civil Action No. 7950-VCP (Del. Ch. Nov. 19, 2012). In denying injunctive relief to a stockholder seeking to delay a stockholder vote on a second-step merger on the basis of inadequate disclosure regarding management financial projections, the Vice Chancellor provided a thoughtful analysis of the relevant issues and precedent.

Background

Ramtron International Corporation is engaged in the manufacture of specialty semiconductor products. In June 2012, Ramtron was faced with a hostile takeover attempt by the much larger technology company, Cypress Semiconductor Corporation, which offered $2.48 in cash for each outstanding Ramtron share. Ramtron's board, armed with the advice of its financial adviser, Needham & Company, rejected this offer as inadequate and commenced a process to “explore strategic alternatives.” While Needham conducted a process in which a number of potential buyers were contacted, Cypress and Ramtrom made various offers and counter-offers. Cypress decided it could proceed with its offer without signing a confidentiality agreement and reviewing non-public information of Ramtron, including management projections, which Cypress believed were “inherently unreliable given both the nature of the industry and Ramtron's record of missing three of the last four years of its own earnings guidance.”

On Aug. 27, Cypress raised its offer to $2.88 per share, to which Ramtron countered on Sept.13 with a price of $3.50. The back-and-forth continued through mid-September, when Cypress finally offered and Ramtron accepted a price of $3.10. Ramtron's decision was supported by a fairness opinion delivered to its board. The acquisition was structured as a two-step transaction, a cash tender offer by Cypress at $3.10 per share conditioned on receipt of a majority of outstanding Ramtron shares, followed by a merger to acquire the remaining shares at the tender offer price.

Because tenders were received from stockholders owning only 78% of the outstanding shares, Ramtron was forced to conduct the second step as a long-form merger in which a Ramtron stockholder vote was required (although the result was pre-ordained given Cypress's 78% stake and its commitment in the merger agreement with Ramtron to vote in favor of the merger). It should also be noted that Cypress did negotiate for a top-up right allowing it to purchase additional shares from Ramtron in order to obtain 90% of the outstanding shares and thereby obviating the need for a stockholder vote under Delaware's short-form merger statute, but Cypress was not allowed to trigger that right unless at least 86% of the outstanding shares were tendered.

Prior to the stockholders' meeting scheduled for Nov. 20 to vote on the merger, Ramtron stockholder Paul Dent commenced a class action lawsuit in the Delaware Court of Chancery, and asked the court to preliminarily enjoin the meeting on the ground that the Ramtron board breached its “fiduciary duty of candor” by failing “to provide sufficient disclosures to allow the company's stockholders to make an informed decision on whether to vote in favor of the merger or, instead, to seek appraisal.” At the heart of Dent's action was his claim that Ramtron failed to disclose management financial projections in its proxy materials that had been provided to Needham in connection with its fairness analysis. Needham used these projections in calculating a discounted cash flow (DCF) analysis yielding an implied value for each Ramtron share ranging from $3.57 to $5.01, well in excess of the price agreed to by Cypress and Ramtron.

The Ramtron board offered several counter-arguments to rebut Dent's allegations, including that:

• Management's projections are “neither accurate nor reliable,” so to include them “would create a greater risk of confusing Ramtron's stockholders than informing them on whether to accept the $3.10 offer price or to seek appraisal.”
• Cypress refused to even look at the projections, characterizing them as “inherently unreliable.”
• Needham's DCF analysis is disclosed in the proxy materials in rather great detail, “conspicuously” demonstrating that the merger price is well below the range of value yielded by the DCF analysis.
• No other bidders had emerged during the process conducted by Needham, despite the publicity generated by Cypress's public hostile tender offer.

The 'Duty of Disclosure'

The Chancery Court began its analysis by noting that to prevail on his motion for a preliminary injunction, plaintiff must, among other things, “prove ' that he has a reasonable probability of success in demonstrating that the failure to disclose these projections constitutes a breach of the board's duty of disclosure.” The court explained that this “duty of disclosure” is actually “a specific application of corporate directors' fiduciary duties of care and loyalty,” which “requires directors to disclose fully and fairly all material information within the board's control when it seeks shareholder action” [emphasis added]. Because the business judgment rule is not applicable in the “shareholder voting context,” rather than “defer[ring] to directors' judgment about what information is material,” the court “determines materiality for itself from the record at the particular stage of the case when the issue arises.”

When the key issue is the materiality of an omitted disclosure, the court explained that “[a]n omitted fact is material if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote.” Moreover, “[a]n omitted fact that otherwise might not be material may become material where the omission renders the partially disclosed information materially misleading.” “Once defendants travel down the road of partial disclosure,” the court noted, “they have an obligation to provide stockholders with an accurate, full, and fair characterization of whatever they disclose.” On the other hand, “Delaware law does not require the disclosure of inherently unreliable or speculative information which would tend to confuse stockholders or inundate them with an overload of information.”

Materiality of Projections

Having established the appropriate standard of review, the court next turned to the question of whether financial projection in general, or the omitted Ramtron projections in particular, are material and need to be disclosed to stockholders asked to vote on a merger. First, the court made it clear that “There is no per se duty to disclose financial projections furnished to and relied upon by an investment banker.” Accordingly, the materiality of any particular financial projections must be decided “in the context of the specific case.”

With regard to the Ramtron management projections, the court found “no facts suggesting that the undisclosed information is inconsistent with, or otherwise significantly differs from, the disclosed information.” As such, “the evidence demonstrates that the projections are not material.” The court cited a number of factors in support of this conclusion:

• The other analyses prepared by Needham ' a selected company analysis, a selected transaction analysis and a stock price premium analysis ' all “indicate that a merger at $3.10 is within a reasonable range, if not on the high side of a reasonable range of merger prices,” making the DCF analysis something of an outlier.
• The proxy statement states that Needham's DCF analysis was “based on Ramtron's management's forecasts,” leading to the “reasonable inference ' that management's projections are relatively optimistic, but were considered by ' the board, and Needham.”
• Despite Ramtron's attempts to convince Cypress to pay $3.50, at the bottom of the DCF range, Cypress would agree to pay no more than $3.10.
• Previous Delaware cases in which projections were found to be “material” contain “factual distinctions” compelling a different result here.
• “[N]o other company expressed interest in buying Ramtron at any price,” despite a serious marketing effort by Needham and Cypress's public bid.
• “[O]thers in the industry, including Cypress ' and one of the few analysts covering Ramtron recently ' have expressed skepticism about the accuracy of forecasts in this industry ' and by Ramtron's management, in particular.”
• Expert testimony revealed that “between October 2011 and June 2012, Ramtron repeatedly failed to achieve its public guidance and also its internal projections.”

Based on its analysis of these various factors, the court concluded that, in the case of the Ramtron management projections, “materiality ' does not turn on whether those projections were reliable or unreliable. Instead, the question is whether there is ' 'a substantial likelihood that the undisclosed information would significantly alter the total mix of information already provided.'” Applying that traditional Delaware standard for disclosure issues, the court found “it is unlikely that a reasonable [Ramtron] stockholder would find the projections to be important as opposed to merely helpful in deciding how to vote on the merger or whether to seek appraisal.” In the court's opinion, “[b]ased on the entirety of the proxy, it appears that defendants have provided stockholders with the information they need to make an informed vote.” It should also be noted that while not key to its ruling on materiality, the court did find that Cypress had completed its tender offer, thus assuring completion of the second step, and expressed the concern that “[e]njoining the stockholder vote ' would delay Cypress's ability to exercise control over Ramtron's business and operations at a time when the company is performing below expectations and may face some level of distress.”

Conclusion

Although the Court of Chancery's opinion in Dent v. Ramtron International Corporation does not really break any new ground, it does provide an excellent overview of how the Delaware courts approach disclosure issues in general, and arguments over the need to provide management projections to stockholders when voting on a fundamental corporate transaction in particular. Plaintiffs seeking to preliminary enjoin a stockholder vote face a difficult burden in any event, and a stockholder seeking to compel disclosure of management projections in proxy materials needs to assert compelling evidence why, as the Ramtron court stated, inclusion would be “important as opposed to merely helpful” to the other stockholders. Generally speaking, absent extraordinary factors in any given case, the disclosure requirements of the SEC and current market practice related to management projections should suffice.

Robert S. Reder has been serving as a consulting attorney at Milbank, Tweed, Hadley & McCloy LLP since his retirement as a partner in April 2011. A member of this newsletter's Board of Editors, Reder also is serving as an Adjunct Professor at Vanderbilt Law School and at Fordham Law School.