Transparency is the Best Policy: Teetering on the Edge of Misleading

By Lisa Stark and Rashida Stevens

In Chatham Asset Management, LLC v. Papanier, C.A. No. 2017-008-AGB (Del. Ch. Dec. 22, 2017), the Delaware Court of Chancery found that the plaintiffs, Chatham Asset Management, LLC, Chatham Fund, LP, and Chatham Asset High Yield Master Fund, Ltd. (collectively, “Chatham”), pleaded sufficient facts to avoid dismissal of a claim that the director defendants of Twin River Worldwide Holdings, Inc. (“Twin River”) breached their fiduciary duties by making materially false and misleading statements in tender offer materials.

This action arose from Twin River’s 2016 offer to purchase up to 250,000 shares of its issued and outstanding common stock for $80 per share (the “Tender Offer”), a $10 premium to the then-trading price of Twin River’s stock. Twin River’s stock did not trade on a national stock exchange, but rather on institutional trading desks.  The offer to purchase stated: “[t]he purpose of the offer is to return cash to [Twin River’s] shareholders” and that Twin River’s officers and directors did not “currently intend” to participate in the Tender Offer but that they may sell their shares “from time to time.” The Tender Offer launched on November 15, 2016, and expired one month later.  Chatham tendered into the Tender Offer because it allegedly had “no choice” given a 15% regulatory cap on its holdings in Twin River which might be surpassed if the number of all issued and outstanding shares of Twin River’s stock decreased while the number of shares of Twin River’s common stock owned by Chatham remained constant.  Within weeks of the Tender Offer closing, the defendant directors and officers of Twin River allegedly shopped, but did not sell, approximately 125,000 of their Twin River’s shares.  In the months after the Tender Offer closed, Twin River’s stock traded between $80 and $82 per share.

In this action, Chatham alleged, among other things, that Twin River’s directors breached their fiduciary duties by making false and misleading statements in the offer to purchase. Chatham alleged that the directors’ true intentions behind the Tender Offer was to cause an increase in the price of Chatham’s stock price and to sell at or near the increased price shortly after the Tender Offer closed.

The Court found that it was reasonably conceivable that the Twin River directors breached their fiduciary duties by misstating the reasons for the Tender Offer and their intention of selling stock. Quoting a federal court, the Court writes, “stating an outcome as a possibility, that in fact is not a possibility, is misleading.” Here, the Court found it plausible that the tender offer disclosure gave the impression that the directors were not committed to selling any shares even though substantial steps were allegedly taken shortly after the tender offer to sell a considerable amount of stock. However, the Court noted that Chatham would likely be unable to establish reliance and causation to recover compensatory damages for its disclosure claim. According to the Court, any damages suffered by Chatham were not likely related to the alleged disclosure violations but rather from the regulatory cap on its holdings in Twin River.

The case serves as a reminder of the importance for officers and directors to ensure that every disclosure to stockholders contains all material facts that may impact an investor’s decision as the slightest deviation from complete transparency could result in the claims brought against them not being dismissed.

Chatham Asset Management, LLC, v. Papanier letter opinion 171222

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