This article continues my series on obligations (and rights and responsibilities) of the board of directors during a merger and acquisition transaction. This blog focuses on the director’s duty of disclosure. A director’s duty of disclosure is part and parcel with their duty of loyalty. That is, the duty of disclosure primarily focuses on a director’s duty to disclose conflicts of interest he may have with respect to any corporate action. However, the duty also extends to a director’s duty to inform shareholders fully on matters involving a shareholder vote and in making any public disclosures.
Duty to Disclose
The duty to disclose (like other duties) only extends to material facts and circumstances. “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.” TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438 (1976). In the case of a merger or acquisition requiring shareholder vote for instance, directors must provide shareholders with material information necessary to make an informed decision. In the case of press releases or other public disclosures, information provided must meet the disclosure obligations as well as the meet the standards for the duties of care and good faith.
Transparency and Shareholders
In In Re Pure Res., 808 A.2d 448, the court held that the directors had a duty to disclose to shareholders the substantive work performed and total involvement of investment bankers in pending merger transaction. The court reasoned that this information would assist an investor in determining whether the value being paid was fair. Other courts have concurred with this opinion and specified that shareholders are entitled to see valuation reports and financial projections prepared by investment bankers in a merger transaction, and it is the board of director’s duty to supply this information. Moreover, other courts have held that shareholders are entitled to be informed of financial advisors roles and compensation in a merger or acquisition transaction.
A director’s duty of disclosure is based in state law and is separate and distinct from a company’s duty to disclose under both the Securities Act of 1933 and Securities Exchange Act of 1934. Whereas the state law duty to disclose supports private causes of action, including possible class action lawsuits, the federal duty supports both private causes of action (including class actions) and regulatory enforcement proceedings.
Attorney Laura Anthony,
Founding Partner, Legal & Compliance, LLC
Securities, Reverse Mergers, Corporate Transactions
Securities attorney Laura Anthony provides ongoing corporate counsel to small and mid-size public Companies as well as private Companies intending to go public on the Over the Counter Bulletin Board (OTCBB), now known as the OTCQB. For more than a decade Ms. Anthony has dedicated her securities law practice towards being “the big firm alternative.” Clients receive fast and efficient cutting-edge legal service without the inherent delays and unnecessary expense of “partner-heavy” securities law firms.
Ms. Anthony’s focus includes but is not limited to compliance with the reporting requirements of the Securities Exchange Act of 1934, as amended, (“Exchange Act”) including Forms 10-Q, 10-K and 8-K and the proxy requirements of Section 14. In addition, Ms. Anthony prepares private placement memorandums, registration statements under both the Exchange Act and Securities Act of 1933, as amended (“Securities Act”). Moreover, Ms. Anthony represents both target and acquiring companies in reverse mergers and forward mergers, including preparation of deal documents such as Merger Agreements, Stock Purchase Agreements, Asset Purchase Agreements and Reorganization Agreements. Ms. Anthony prepares the necessary documentation and assists in completing the requirements of the Exchange Act, state law and FINRA for corporate changes such as name changes, reverse and forward splits and change of domicile.
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