Vento v. Curry: Preliminary Injunction to Remedy Buried Disclosure of Fees to Be Paid to Affiliate of Financial Advisor for Providing Transaction Financing
May 25, 2017
In Vento v. Curry, 2017 WL 1076725 (Del. Ch. Mar. 22, 2017), the Court of Chancery preliminarily enjoined a special meeting of stockholders of Consolidated Communications Holdings, Inc. (“Consolidated” or the “Company”) to vote on a proposed issuance of the Company’s common stock in connection with a proposed merger. Finding information concerning the compensation to be received by the Company’s financial advisor and its affiliates in connection with providing a portion of the financing for the merger to be both material and quantifiable, the Court determined that Consolidated had failed to disclose this information “in a clear and transparent manner” to its stockholders.
On December 3, 2016, Consolidated entered into a merger agreement with FairPoint Communications, Inc. (“FairPoint”), under which Consolidated would acquire FairPoint in a stock-for-stock merger. The merger was expected to close in mid-2017. Morgan Stanley & Co. LLC (“Morgan Stanley”) served as the lead financial advisor for Consolidated, and an affiliate of Morgan Stanley committed to provide part of the debt financing for the merger. NASDAQ listing rules obliged Consolidated to secure a vote of its stockholders approving the issuance of the shares to be used as merger consideration. In a Form S-4 Registration Statement filed on January 26 and amended on February 24, 2017 (the “Amended Registration Statement”), Consolidated announced a special meeting of the Company’s stockholders to be held on March 28, 2017, to vote on the proposed share issuance.
On March 3, 2017, a stockholder plaintiff filed an action alleging that the Company’s directors breached their fiduciary duties by failing to disclose in the Amended Registration Statement details concerning the amount of compensation Morgan Stanley expects to earn in connection with providing a portion of the debt financing for the merger. Specifically, the Amended Registration Statement disclosed the fees paid to Morgan Stanley by both Consolidated and FairPoint in connection with current and prior advisory and financing services, but stated only that the Morgan Stanley affiliate would receive “additional fees” from Consolidated for providing a portion of the debt financing for the merger. On March 14, 2017, plaintiff filed a motion for a preliminary injunction to suspend the stockholder vote until the Company further amended the Amended Registration Statement to disclose this information.
Defendants did not dispute that the fees to be earned by the Morgan Stanley affiliate in connection with merger financing were both material and quantifiable. They noted instead that the Amended Registration Statement identified (as a pro forma balance sheet adjustment) the total amount of the fees to be paid for the financing commitment, and a separate Form 8-K, filed several weeks earlier, had attached the commitment letter showing that the Morgan Stanley affiliate would provide approximately 40% of the committed financing. On that basis, defendants argued that the Amended Registration Statement enabled a stockholder to estimate that the Morgan Stanley affiliate would receive approximately 40% of the fee amount.
The Court rejected defendants’ argument. Relying on the “buried facts” doctrine, the Court found it unreasonable to require stockholders to embark on a “scavenger hunt to try to obtain a complete and accurate picture of a financial advisor’s financial interests in a transaction,” which, the Court reiterated, is information critical to the stockholders’ assessment of how much weight to afford a financial advisor’s analysis of a proposed transaction. The Court therefore determined that “there is simply no excuse for Consolidated’s failure to disclose that information in a clear and transparent manner.” The Court thus found that it was probable that plaintiff would succeed on the merits of his disclosure claim, and that the remaining elements of the preliminary injunction test were met.
The Court enjoined the meeting until five days after Consolidated supplemented its disclosures to provide a “clear and direct explanation of the amount of financing-related fees” Morgan Stanley and its affiliates would receive in connection with the merger, if approved.