Delaware Supreme Court Holds Proxy Disclosures Deficient In Failing To Disclose Advisors’ Conflicts Of Interests
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  • Delaware Supreme Court Holds Proxy Disclosures Deficient In Failing To Disclose Advisors’ Conflicts Of Interests

    05/07/2024

    On May 1, 2024, the Delaware Supreme Court, sitting en banc, reversed the dismissal of breach of fiduciary claims against Inovalon Holdings, Inc. (the “Company”) and its CEO and directors in connection with the Company’s acquisition by a private equity firm (the “Acquiror”) and its co-investors (the “Transaction”). City of Sarasota Firefighters’ Pension Fund v. Inovalon Holdings, Inc., C.A. No. 2022-0698 (Del. May 1, 2024). The Court held that the trial court erred in finding that the MFW[1] requirements were met because plaintiffs adequately alleged that the proxy statement seeking approval for the Transaction failed to adequately disclose information that was potentially material to investors. The Court did not address plaintiffs’ argument that MFW “cleansing” was also unavailable because the Company allegedly failed to condition the Transaction ab initio on special committee approval.

    The Company was approached in late 2020 by multiple potential counterparties expressing interest in a strategic transaction. The CEO—who held approximately 64% of voting power—and a financial institution (“Financial Advisor 1”) engaged in preliminary discussions with potential counterparties in consultation with the board, which formed a special committee in June 2021. The special committee retained a second financial advisor (“Financial Advisor 2”) and met 23 times to oversee a sale process with numerous potential bidders before approving the Acquiror’s offer, which rolled over the equity of the CEO. Both financial advisors disclosed relevant relationships to the special committee but omitted details regarding prior or concurrent engagements with the Acquiror or its co-investors, including the amount of fees received on certain deals. After the Transaction was approved by 99% of minority stockholders, plaintiffs brought suit alleging breach of fiduciary duty, unjust enrichment, and breach of the Company’s charter. On appeal, plaintiffs argued, in relevant part, that the proxy statement issued in connection with the Transaction allegedly omitted material information.

    In reaching its conclusion that the protections of MFW were unavailable to trigger the business judgment rule in a deal with a controller allegedly on both sides of the Transaction, the Court held that the proxy did not adequately disclose “the nature and extent” of the financial advisors’ alleged conflicts. The Court reasoned that omitting the specific amount of fees received by Financial Advisor 1 from ongoing and prior work with the Acquiror and its co-investors was potentially misleading because Company stockholders could not compare those fees to the amount of fees received in the Transaction. Relying on its decision in City of Dearborn Police and Fire Revised Ret. Sys. V. Brookfield Asset Mgmt., Inc., 2024 WL 1244032 (Del. 2024), the Court reiterated that a disclosure in the proxy that Financial Advisor 2 “may” provide advisory services to the Acquiror, and a co-investor was potentially misleading because Financial Advisor 2 allegedly was in fact concurrently representing those parties. Additionally, the Court noted that the proxy appeared to overstate the role of Financial Advisor 2 and was thus likely potentially misleading because it suggested to investors that Financial Advisor 2 “was in a better position than it actually was to mitigate any effects of [Financial Advisor 1’s] conflicts” (while acknowledging that there was “nothing wrong with [Financial Advisor 1] taking the lead”), but the Court declined to “‘pile on’ another basis for reversal.”

    [1]Khan v. M & F Worldwide Corp., 88 A.3d 635 (Del. 2014).

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