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Appel v. Berkman

Supreme Court of Delaware

February 20, 2018

STEPHEN APPEL, individually and on behalf of all others similarly situated, Plaintiff Below, Appellant,

          Submitted: January 17, 2018

         Court Below: Court of Chancery of the State of Delaware C.A. No. 12844-VCM

          Jeremy Friedman, Esquire, Spencer Oster, Esquire, David Tejtel, Esquire, FRIEDMAN OSTER & TEJTEL PLLC, New York, New York; Peter B. Andrews, Esquire, Craig J. Springer, Esquire (argued), David M. Sborz, ANDREWS & SPRINGER LLC, Wilmington, Delaware, Attorneys for Appellant, Stephen Appel and on behalf of all others similarly situated.

          Mark A. Kirsch, Esquire, Jefferson E. Bell, Esquire, GIBSON, DUNN & CRUTCHER LLP, New York, New York; Brian M. Lutz, Esquire, GIBSON, DUNN & CRUTCHER LLP, San Francisco, California; Raymond J. DiCamillo, Esquire (argued), Elizabeth DeFelice, Esquire, RICHARDS, LAYTON & FINGER, P.A., Wilmington, Delaware, Attorneys for Appellees, David J. Berkman, Richard M. Daley, Frankie Sue Del Papa, Jeffrey W. Jones, David Palmer, Hope S. Taitz, Zachary D. Warren, and Robert Wolf.

          Stephen B. Brauerman, Esquire (argued), Sara E. Bussiere, Esquire, BAYARD, P.A., Wilmington, Delaware, Attorneys for Appellee, Stephen J. Cloobeck.

          Before STRINE, Chief Justice; VALIHURA and TRAYNOR, Justices.

          STRINE, Chief Justice


         Diamond Resorts International's board of directors recommended to its stockholders that they sell their shares to a private equity buyer, Apollo Global Management, for cash in a two-step merger transaction involving a front-end tender offer followed by a back-end merger under Section 251(h). The proxy statement had a detailed recitation of the background leading to the merger, and the reasons for and against it. But notably absent from that recitation was that the company's founder, largest stockholder, and still Chairman, Stephen J. Cloobeck, had abstained from supporting the procession of the merger discussions, and from ultimately approving the deal, because:

he was disappointed with the price and the Company's management for not having run the business in a manner that would command a higher price, and that in his view, it was not the right time to sell the Company.[1]

         On a motion to dismiss, the Court of Chancery held that the complaint challenging the merger should be dismissed because the stockholders' acceptance of the first- step tender offer was fully informed, rejecting the plaintiffs' argument that the omission of the Chairman's reasons for abstaining rendered the proxy statement materially misleading.

          In this appeal, the sole issue is whether that ruling was correct. We agree with the plaintiffs that it was not, and that the defendants' argument that the reasons for a dissenting or abstaining board member's vote can never be material is incorrect. Precisely because Delaware law gives important effect to an informed stockholder decision, [2] Delaware law also requires that the disclosures the board makes to stockholders contain the material facts and not describe events in a materially misleading way.[3] Here, the founder and Chairman's views regarding the wisdom of selling the company were ones that reasonable stockholders would have found material in deciding whether to vote for the merger or seek appraisal, and the failure to disclose them rendered the facts that were disclosed misleadingly incomplete. Therefore, we reverse the order dismissing the plaintiffs' claims.


         Cloobeck founded Diamond Resorts, a hospitality and vacation ownership company, in 2007, and served as its Chairman and CEO from its inception through December 2012.[4] After Diamond Resorts went public in 2013, Cloobeck continued to serve as its Chairman.[5]

         In February 2016, the Diamond Resorts board formed a strategic review committee to review "strategic alternatives, " and in March 2016 that committee began a public sales process.[6] During the week of April 25, 2016, "the Company received written indications of interest to acquire the Company from five parties" ranging from a low of $23 per share to a high of $33 per share.[7] And throughout May and June, the company's management conducted due diligence with potential bidders.[8] On June 23, 2016, two bids surfaced: Apollo's for $30.25 per share, and "Sponsor B's" for $27 to $29 per share, conditioned upon additional diligence.[9]

         On June 26, 2016, the Diamond Resorts board voted in favor of the company's sale to Apollo.[10] But Cloobeck abstained from that vote. In not one, but two board meetings, Cloobeck said that he was abstaining because mismanagement of Diamond Resorts had negatively affected the sale price and it was therefore not the right time to sell the company. As recorded in both the June 25th and 26th board meeting minutes, Cloobeck expressed to the board that:

he was disappointed with the price and the Company's management for not having run the business in a manner that would command a higher price, and that in his view, it was not the right time to sell the Company.[11]

         But, in its lengthy Schedule 14D-9 Solicitation/Recommendation Statement (the "14D-9") recommending that stockholders tender their shares to Apollo, the board did not disclose to stockholders the reasons for Cloobeck's abstention.[12]Instead, the 14D-9 simply stated that "[a]ll of the directors voted in favor of [the transaction] with the exception of the Company's chairman, who abstained."[13] As to Cloobeck's position on tendering his own shares, the 14D-9 stated that, "[t]o the Company's knowledge, the chairman of the board of directors has not yet determined whether to tender . . . his shares."[14] Cloobeck is the same Chairman who the board described in the following way to stockholders in its most recent annual election proxy before the tender offer:

Mr. Cloobeck[] [has a] unique understanding of the opportunities and challenges that we face and . . . in-depth knowledge about our business, including our customers, operations, key business drivers and long-term growth strategies, derived from his 30 years of experience in the vacation ownership industry and his service as our founder and former Chief Executive Officer.[15]

         On August 8, 2016, the plaintiffs served a Section 220 demand on the company, asking to inspect its books and records.[16] About a week later, Cloobeck tendered his 15 percent of the Diamond Resorts shares.[17] Then, on September 2nd, having exceeded the 50 percent level of ownership necessary to consummate the transaction's back-end merger under Section 251(h) without a stockholder vote, Apollo consummated the merger.[18] Approximately two months after the deal closed, the plaintiffs brought this suit, challenging the merger's fairness and "the failure of the board to disclose all material information to the Diamond stockholders regarding the tender offer."[19] The Court of Chancery dismissed the plaintiffs' claims for damages because the stockholders "overwhelmingly" accepted the tender offer upon disclosure of all material facts.[20] As to the issue before us, the Court of Chancery held that Cloobeck's views that the company had been managed suboptimally, the sale price was disappointing as a result, and therefore it was not a good time to sell the company were immaterial as a matter of law and their inclusion in Diamond Resorts' disclosures would not have materially altered the mix of information.[21]


         The high-stakes context for evaluating whether the Court of Chancery's stark ruling is correct is important to bear in mind. Here, the Diamond Resorts board was recommending to its stockholders that they cash out their investments. But the Chairman of the Board, the very person who founded Diamond Resorts and under whose leadership as CEO the company flourished and became a global operation, did not agree with that recommendation. The 14D-9 recites at length the events leading to the board's approval of the transaction and the reasons for the board's recommendation that stockholders accept Apollo's tender offer.[22] But, somehow, that course of events does not include what we think to be a material fact that a reasonable investor in the company would wish to know: Cloobeck thought that it was the wrong time to sell.

         "[D]irectors of a Delaware corporation have a fiduciary duty to disclose fully and fairly all material information within the board's control that would have a significant effect upon a stockholder vote when it seeks or recommends shareholder action, such as when a tender offer or vote is presented."[23] Information is material if there is a:

substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote. . . . Put another way, there must be a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the total mix of information made available.[24]

         In contending that Cloobeck's reasons for not supporting the sale were immaterial, the defendants make much of the distinction between opinion and fact, arguing that because Cloobeck's belief that it was the wrong time to sell was just his opinion, his expression of that opinion to the board cannot be a material fact that requires disclosure.[25] But, in this context, that distinction is of little relevance, because proxy statements seeking approval of major transactions are filled with statements of fact about opinions, in the sense that they recount why fiduciaries and their advisors took certain actions and why they believed the transaction was in the company's best interest. To this point, acres and acres of the 14D-9 focus on identifying the subjective reasons for the transaction, as well as other reasons against it.[26] For example, the 14D-9 lists the following opinions in its discussion of why the board recommended that stockholders tender their shares:

• [T]he strategic review committee's and the board of directors' belief . . . that the Company's strategic plan involved significant risks in light of the industry and competitive pressures the Company was facing and the strategic review committee's and the board of directors' concerns with respect to the risks relating to the Company's ability to execute on its strategic plan including the ...

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