Court of Chancery Clarifies the Scope of Disclosure Liability in Novel Contexts

Under Delaware law, corporate fiduciaries owe an affirmative duty of disclosure when seeking stockholder action—including, for example, presenting a matter for stockholder approval or proposing a transaction that otherwise requires stockholders to make an investment decision, such as whether to seek appraisal or participate in a corporation’s self-tender. In these circumstances, directors owe an affirmative duty to disclose all material information within the board’s control. Delaware courts have also established that when directors are not seeking stockholder action but choose to speak on a given topic, they must be truthful. In two recent opinions, the Delaware Court of Chancery addressed the scope of disclosure liability in two novel contexts.

First, in Cygnus Opportunity Fund v. Washington Prime Group, 2023 WL 5113279 (Del. Ch. Aug. 9, 2023), the Court of Chancery considered whether fiduciaries had an affirmative disclosure duty in connection with a third-party private tender offer and second-step merger. There, the controlling unitholder of a privately held Delaware limited liability company squeezed out minority unitholders through an all-cash tender offer followed by a merger. Although the LLC’s operating agreement eliminated both directors’ and the controller’s fiduciary duties, it was silent as to officers, who owed the same fiduciary duties as corporate directors and officers by default. That enabled plaintiffs to challenge the transaction in part on grounds that the LLC’s officers breached their fiduciary duties by failing to provide any disclosure on the tender offer and by issuing “paltry” disclosures about the merger. Defendants moved to dismiss for failure to state a claim, arguing that no affirmative disclosure duties arose because the controlling unitholder, which was the only party that could have possibly been obligated to make disclosures to the minority unitholders, owed no fiduciary duties under the operating agreement, and no disclosure duty applied in the second-step merger because it did not require unitholder approval.