The full case caption appears at the
end of this opinion. In this appeal, we consider the adequacy of corporate disclosures to minoritystockholders who were “cashed out” in a merger approved by the majority stockholder.The minority stockholders complain that they were not given enough financialinformation to decide whether to accept the merger consideration or seek appraisal.They say, in essence, that the settled law governing disclosure requirements formergers does not apply, and that far more valuation data must be disclosed where, ashere, the merger decision has been made and the only decision for the minority iswhether to seek appraisal. We hold that there is no different standard for appraisaldecisions. Directors must disclose all material facts within their control that areasonable stockholder would consider important in deciding how to respond to thepending transaction. The Court of Chancery applied the proper standard and correctlyconcluded that the minority stockholders’ disclosure claims were legally insufficient. Accordingly, we affirm. I. Factual and Procedural Background William M. Skeen and Jacqueline L. Skeen are former stockholders of Houseof Fabrics, Inc. (HF), a large retailer specializing in home sewing and crafts. OnFebruary 1, 1998, HF agreed to be acquired by Fabri-Centers of America, Inc. (FCA)in a two-step transaction – a tender offer for a majority (or all) of the HF shares at$4.25 per share followed by a merger at the same price. FCA acquired approximately77% of HF’s outstanding stock in the tender offer and immediately thereafter beganmaking changes in HF’s operations. FCA replaced five of HF’s seven directors;FCA’s Chairman and President took over as CEO of HF; the new HF Board announcedthe relocation of HF’s headquarters; and FCA advanced funds to pay off HF’soutstanding indebtedness (approximately $43 million). About three weeks after the tender offer closed, HF announced the second stepmerger. HF sent the minority stockholders a Notice of Special Meeting ofStockholders and an Information Statement, but not a proxy. HF explained that FCAowned enough shares of HF to approve the merger without the affirmative vote of anyother stockholder. As a result, the minority stockholders were not asked to cast votesat the scheduled April 21, 1998 special meeting. Although no proxies were solicited,the Notice and Information Statement included the type of information normally foundin a merger proxy statement, including a description of the companies, the backgroundof the merger, merger terms, and relevant financial information. In addition, theInformation Statement described the stockholders’ appraisal rights and included areprint of the appraisal statute, 8 Del.C. � 262, in the appendix. The merger was approved and completed on April 21, and the Skeens acceptedthe merger consideration. Nine months later, they filed this action alleging that FCAand HF’s directors breached their fiduciary duties by failing to disclose: (i) FCA’s planfor HF and the extent that the plan had been implemented; (ii) the reason HF’s boarddecided to sell the company; (iii) the range of HF’s fair value, as determined by HF’sinvestment banker; (iv) management’s financial projections for 1998-2003; (v) financialreports for the first quarter of 1998; and (vi) the prices discussed with others for thesale or all or parts of HF.
[FOOTNOTE 1] Defendants moved to dismiss the complaint and the Skeensfiled a cross-motion for partial summary judgment. The Court of Chancery grantedthe motion to dismiss for failure to state a claim and denied the cross-motion. II. Discussion Directors of Delaware corporations are fiduciaries who owe duties of due care,good faith and loyalty to the company and its stockholders.
[FOOTNOTE 2] The duty of disclosure isa specific formulation of those general duties that applies when the corporation isseeking stockholder action.
[FOOTNOTE 3] It requires that directors “disclose fully and fairly allmaterial information within the board’s control….”
[FOOTNOTE 4] Omitted facts are material “ifthere is a substantial likelihood that a reasonable stockholder would consider [them]important in deciding how to vote.”
[FOOTNOTE 5] Stated another way, there must be “a substantiallikelihood that the disclosure of the omitted fact would have been viewed by thereasonable stockholder as having significantly altered the ‘total mix’ of informationmade available.”
[FOOTNOTE 6] These disclosure standards have been expressed in much the same language overthe past 25 years. In the merger context, the particular stockholder action beingsolicited usually is a vote, and the oft-quoted language from our cases refers toinformation the stockholders would find important in deciding how to vote. But thevote, if there is one, is only part of what the stockholders must decide. Appraisalrights are available in many mergers, and stockholders who vote against the mergeralso must decide whether to exercise those rights. In this case, the Court of Chancery occasionally referred to the informationstockholders would need to decide how to vote, and Appellants use those references toargue that the trial court misapprehended the nature of the decision they faced. Thisargument not only lacks merit, it borders on the frivolous. The trial court reviewed thebackground to the merger; noted that FCA owned 77% of the HF stock; andspecifically stated that the materiality determination, “requires an assessment of whata ‘reasonable investor’ would consider when making a decision to vote or exerciseappraisal rights.” There is no doubt that the Court of Chancery understood the choicespresented to HF’s minority stockholders. The real issue on appeal is whether the complaint adequately alleges anydisclosure deficiencies. Appellants allege that the Information Statement failed todisclose FCA’s plan for HF and a summary of the steps taken as of the merger date toimplement that plan. They claim that this information would be important for them todecide how much value FCA had added to HF between the tender offer and the merger.Appellants acknowledge that certain interim events were disclosed (the change ofdirectors and officers, plan to relocate headquarters, and debt refinancing), but theyallege that those “bits and pieces” of the plan were inadequate. To state a disclosure claim, appellants “must provide some basis for a court toinfer that the alleged violations were material….[They] must allege that facts aremissing from the [information] statement, identify those facts, state why they meet themateriality standard and how the omission caused injury.”
[FOOTNOTE 7] Appellants have not metthis pleading requirement. They offer no undisclosed facts concerning the supposed”plan” that would have been important to the appraisal decision. Instead, theyspeculate that (i) there must have been some value added between the tender offer andthe merger; (ii) the added value would be included in the determination of fair valueunder the appraisal statute; and (iii) the added value would be significant enough to beimportant to reasonable stockholders deciding whether to pursue appraisal.Unsupported conclusions and speculation are not a substitute for facts. Appellants next complain that the Information Statement fails to disclose the realreason HF decided to sell the company – to satisfy the stockholders who obtained theirstock in HF as a result of the company’s 1994 bankruptcy. They acknowledge that theInformation Statement lists ten reasons why the HF board recommended the merger,but allege that the disclosed reasons were not the “predominate reason.” Again, thepleading fails to explain why this undisclosed reason for the merger (if true) would beimportant to the stockholders’ decision. All HF stockholders, even those who obtainedtheir stock in the bankruptcy, want to realize the best price available for their shares.Thus, the undisclosed reason would add little or nothing to the information provided. Appellants also complain about several alleged deficiencies in the financial datathat was disclosed. The Information Statement included a copy of the fairness opiniongiven by HF’s investment banker, Donaldson, Lufkin & Jenrette (DLJ); the company’saudited and unaudited financial statements through January 31, 1998; and HF’squarterly market prices and dividends through the year ended January 31, 1998. Thecomplaint alleges that, in addition to this financial information, HF’s directors shouldhave disclosed: (1) a summary of “the methodologies used and ranges of valuesgenerated by DLJ” in reaching its fairness opinion; (2) management’s projections ofHF’s anticipated performance from 1998 – 2003; (3) more current financial statements;and (4) the prices that HF discussed for the possible sale of some or all of the companyduring the year prior to the merger. Appellants allege that this added financial data is material because it would helpstockholders evaluate whether they should pursue an appraisal. They point out that the$4.25 per share merger price is 20% less than the company’s book value. Since bookvalue generally is a conservative value approximating liquidation value, they wonderhow DLJ could conclude that the merger price was fair. If they understood the basisfor DLJ’s opinion, appellants say they would have a better idea of the price they mightreceive in an appraisal. Projections, more current financials and information aboutprices discussed with other possible acquirors, likewise, would help them predict theirchances of success in a judicial determination of fair value. The problem with appellants’ argument is that it ignores settled law. Omittedfacts are not material simply because they might be helpful. To be actionable, theremust be a substantial likelihood that the undisclosed information would significantlyalter the total mix of information already provided. The complaint alleges no factssuggesting that the undisclosed information is inconsistent with, or otherwisesignificantly differs from, the disclosed information. Appellants merely allege that theadded information would be helpful in valuing the company.Appellants are advocating a new disclosure standard in cases where appraisal isan option. They suggest that stockholders should be given all the financial data they.would need if they were making an independent determination of fair value. Appellants offer no authority for their position and we see no reason to depart fromour traditional standards. We agree that a stockholder deciding whether to seekappraisal should be given financial information about the company that will be materialto that decision. In this case, however, the basic financial data were disclosed andappellants failed to allege any facts indicating that the omitted information wasmaterial. Accordingly, the complaint properly was dismissed for failure to state aclaim. III. Conclusion Based on the foregoing, the decision of the Court of Chancery grantingappellees’ motion to dismiss and denying appellants’ cross-motion for partial summaryjudgment is affirmed. :::FOOTNOTES:::
FN1 The Complaint also alleges that HF violated �� 251 and 262 by failing to mail the Notice and Information Statement on April 1, 1998. Appellants did not appeal from the dismissal of this claim,however, so it will not be addressed.
FN2 Malone v. Brincat, Del. Supr., 722 A.2d 5, 10 (1998).
FN3 Id.
FN4 Stroud v. Grace, Del. Supr., 606 A.2d 75, 84 (1992).
FN5 Louden v. Archer-Daniels-Midland Co., Del. Supr., 700 A.2d 135, 142 (1997).
FN6 Ibid.
FN7 Id. at 140.
Skeen v. Jo-Ann Stores, Inc. Supreme Court of the State of Delaware WILLIAM M. SKEEN and JACQUELINE L. SKEEN, Plaintiffs Below, Appellants, v. JO-ANN STORES, INC., HOUSE OF FABRICS, INC., ALAN ROSSKAMM, BRIAN P. CARNEY,DAVID E. BOLEN, JANE A. AGGERS, JOHN W. HERMSEN, R. N. HANKIN,and H. MICHAEL HECT, Defendants Below, Appellees. No. 448, 1999 Submitted: February 8, 2000 Decided: May 3, 2000 Before: VEASEY, Chief Justice, HARTNETT and BERGER, Justices Appeal From: Court of Chancery Counsel for Appellants: Ronald A. Brown, Jr. Counsel for Appellees: Allen M. Terrell, Jr., Srinivas M. Raju, Michael D. Allen, Peter B. Ladig, David J. Hooker, Keith L. Carson, and Lisa R. Battaglia
