Vice Chancellor Joseph Slights.

A Delaware Chancery Court judge on Tuesday denied business judgment protections to the directors of telecommunications firm Tangoe Inc., saying plaintiffs could possibly show that the board withheld important information from investors during a $256 million bid to take the company—which was under intense scrutiny from regulators—private.

The ruling, from Vice Chancellor Joseph R. Slights III, refused the Tangoe board's motion to dismiss a shareholder class action from former Tangoe investors who claim they were shortchanged in the company's April 2017 sale to Marlin Equity Partners. Under the 2015 Delaware Supreme Court decision in Corwin v. KKR Financial Holdings, Slights said, directors failed to show that they had failed to adequately explain the deal to investors amid a time of extraordinary turmoil for the company.

Under Corwin, directors receive business judgment protections for transactions that were approved by a majority of uncoerced and fully informed stockholders. The case has caused some alarm within the plaintiffs' bar, stirring concerns that it could lead to a clampdown on stockholder litigation in Delaware.

However, judges have since been careful not to apply Corwin in cases where the Supreme Court's conditions are not met.

On Tuesday, Slights used the analogy of “navigating stormy waters” in refusing pleading-stage  deference to Tangoe's board.

“The business judgment rule protects directors in good times and in bad,” Slights wrote in a 41-page memorandum opinion.

“But, to earn pleading-stage business judgment deference by invoking stockholder approval of a challenged transaction, the directors must demonstrate that they carefully and thoroughly explained all material aspects of the storm to stockholders—how the company sailed into the storm, how the company has been affected by the storm, what alternative courses the company can take to sail out of the storm and the bases for the board's recommendation that a sale of the company is the best course.”

The case stemmed from the board's decision to sell the company to Marlin, after Tangoe announced it would restate nearly three years of financial statements on discovering that it had incorrectly recognized $30.5 million in revenue in filings with the U.S. Securities and Exchange Commission. The revelation led to a steep drop in Tangoe's stock price and garnered the interest of Marlin, which had indicated its intention to launch a proxy contest after taking a 10.4 percent stake in the firm.

According to court documents, Tangoe delayed its restatement, prompting NASDAQ to delist the company's stock and threaten deregistration.

The plaintiffs claimed that the Tangoe board then pivoted to a quick sale, realizing that they would be ineligible for equity awards while the restatement was still pending. They argued in court documents that they were never told about when, or if, the restatement would be complete or about the directors' attempts to actively interfere with the process.

In his ruling, Slights described the information provided to stockholders as “sporadic and highly qualified,” saying the omissions raised a “reasonable inference” that investors were not fully informed when they were asked to approve the deal.

“Extraordinary transactions proposed to stockholders in the midst of extraordinary times must be explained with commensurate care. And, of course, in trying times, the directors must remain focused on the best interests of stockholders, not their own interests,” he said. “The director defendants may ultimately demonstrate that they discharged their duty of full disclosure and discharged their duty of loyalty in recommending the transaction to Tangoe stockholders.”

Joel A. Fleming, a Block & Leviton partner who represented the plaintiffs, said the decision was good for shareholders and another example that the concerns raised after the Corwin decision had turned out not to be true.

“We're gratified by the decision, and we look forward now to the discovery process and getting a fair recovery,” he said.

An attorney for the Tangoe directors did not return a call Wednesday morning seeking comment on the ruling.

The plaintiffs are represented by Fleming in Boston and Jeremy S. Friedman, Spencer Oster and David F.E. Tejtel of Friedman Oster & Tejtel in New York. Kurt M. Heyman and Melissa N. Donimirski of Heyman Enerio Gattuso & Hirzel are acting as Delaware counsel.

The director defendants are represented by William H. Paine, Timothy J. Perla, Peter A. Spaeth and Alexandra C. Boudreau of Wilmer Cutler Pickering Hale and Dorr in Boston and Catherine G. Dearlove and Sarah A. Galetta of Richards, Layton & Finger in Wilmington.

The case is captioned In re Tangoe Stockholders Litigation.