Corporate Governance

Delaware Courts and the Validation of Misleading Disclosure: In re Transkaryotic (The Anti-Shareholder Bias) (Part 1)

By J. Robert Brown

It is tough to be a plaintiff's lawyer in Delaware, as the decision in In re Transkaryotic Therapies illustrates.  The case is full of tendentious tone and criticism of the plaintiff.  

But worse than attitude, the case contains very bad law and demonstrates once again that the Delaware courts have no interest in imposing meaningful standards on boards of directors.  First, the Court, without authority, held that it could not grant injunctive or monetary relief for false disclosure in connection with a merger once the merger was consummated.  This was apparently true even where the false disclosure was only discovered after the merger closed and the vote was "close" (the merger passed "by less than a million votes.").  While this is only the opinion of one person on the Chancery Court, if it becomes controlling, it is tantamount to a holding that companies can issue false disclosure that affects the vote of shareholders and escape any consequence so long as the false disclosure remains undisclosed until after the merger closes.

Second, the Court arbitrarily lifted the standard of proof for plaintiffs challenging the vote to approve a merger, requiring clear and convincing evidence.  The opinion implied that this was necessary in cases of excessive delay between the date of the merger and the date of the law suit.  In this case, the delay was about 19 months, hardly an excessive time period, and the Plaintiffs alleged that the delay occurred at least in part because of the actions of the Defendants.  The Court ignored both and used the case as a vehicle to impose the higher standard.

We will spend a few days examining this opinion.  As usual, we have posted many of the primary documents involved in the case  on the DU Corporate Governance web site. 

Full post as published by The Race to the Bottom on July 21, 2008 (boomark / email).