Pure Resources “Fair Summary” Standard: Disclosures Away From Obtaining Clarity In The M&A Context
Brittany M. Guisini
The duty of disclosure, a subset of the fiduciary duties of care and loyalty, has been a stark principle of Delaware M&A law since as early as 1899. Despite decades of consistency, the duty of disclosure has witnessed substantial change in recent years insofar as it relates to M&A fiduciary law. In 2000, the Delaware Supreme Court, in the pivotal case Skeen v. Jo-Ann Stores, Inc., articulated the standard, which would govern subsequent disclosure claims in the M&A arena. This standard was thereafter reinforced in McMullin v. Beran. In 2002, however, the Court of Chancery in In re Pure Resources Litigation, expressed a need for a clearer standard to end the “apparent” clash between Skeen and McMullin, and implemented the “fair summary” standard to govern future disclosure claims.
Since Pure Resources, the fair summary standard has reigned and Delaware has quickly lost sight of the standard set forth by the Skeen and McMullin courts. M&A lawsuits, after Pure Resources, prove that the standard produces inconsistent holdings and also requires increased disclosure by directors. These increasing disclosure requirements have likewise manifested in related litigation regarding the disclosure of banker’s conflicts, range of value and projections, and partial disclosures.
This change in the disclosure standard has produced several negative consequences. First, it has increased shareholder litigation in Delaware with little to no benefit to shareholders. Second, the newfound standard has strained the way in which investment bankers do business and attempted to trump SEC regulations. Third, it has expanded the Court of Chancery’s equitable powers to a level not contemplated at its inception. Fourth, the standard has expanded the requirements for fairness opinions, causing them to be viewed as a handicap rather than a safeguard as they were originally intended. In evaluating the effects of the fair summary standard, Delaware should abandon this standard and implement a replacement standard. Model disclosure or a statutory proposal is not apt to solve the problem.
This Note offers a three-tier approach to solving the issues resulting from the Court of Chancery’s decision in Pure Resources. Under the first tier, disclosure of “substantive work performed by the investment bankers upon whose advice the recommendations of their board as to how to vote on a merger or tender rely,” should be judged by the “materiality” standard set out by the Delaware Supreme Court in Skeen. In determining materiality, Delaware courts should apply the deferential business judgment rule. Under the second tier, once a disclosure claim has been initiated, boards should present the reviewing court with sufficient facts indicating why the information sought by the shareholders was not material. If a board does not disclose material information in good faith, the board’s failure to disclose such information should be subjected to the entire fairness review and would be subject to contract damages. The third tier requires the same analysis as the second tier; however, if the board acts in bad faith and fails to disclose, heightened equitable damages attach.
Using this proposed test will create the essential clarity lacking in the fair summary standard, decrease unnecessary litigation, and hold out the Delaware courts as they should—predictable, reliable, and expedient.