The following analysis of the recent Delaware Chancery ruling in In re SeraCare Life Sciences, CA No. 7250-VCG (Del. Chanc. March 20, 2012) was sent in by Alston & Bird Partner and Practice Center Contributor Kevin Miller.
In the recent ruling by Vice Chancellor Glasscock in In re SeraCare Life Sciences, the Court denied plaintiffs motion to expedite discovery based on disclosure and process claims including the failure to disclose free cash flows developed by the target’s financial advisor and the failure to disclose the target’s expectations regarding its ability to utilize its net operating loss carry forwards. The Court was troubled by the fact that the buyer’s financial advisor had previously advised the target in a prior sale process but could not see how a preliminary injunction would provide an effective remedy and consequently refused expedition on that ground.
Standard of Review
“First, let me address the standard for this case. In order to receive expedition, the plaintiffs must assert colorable claims and a sufficient possibility of threatened irreparable injury to justify the high cost of expedition. And while colorable claim is certainly a low standard, the costs that are involved with expedition are not, in themselves, insignificant. And so I take the colorable claim part of this analysis seriously.
Here, the plaintiffs assert a variety of challenges to the merger, including disclosure violations, preclusive deal protections, and insufficient process. None of these allegations satisfy, in my opinion, the standard of colorability in light of the costs that would be required for expedition, and so I am denying the motion to expedite.”
The Disclosure Claims
“And I first turn to the disclosure violations alleged. I note the board must disclose all information material to the stockholders in deciding how to vote. The issue in examining whether that has been done is whether the sought-after information would have significantly altered the total mix of information in the eyes of a reasonable stockholder. The information material to a stockholder deciding on whether to vote in favor of a merger is the information related to the fairness of the proposed merger, not mergers that fell through or never happened or were unattainable. A list of disclosure requirements of the “more details please” kind tend not to constitute colorable claims worthy of significant expense through an expedited proceeding.
The plaintiffs here focused on two disclosure issues at the teleconference: The non-disclosure of free cash flows derived and used by Lazard, and the non-disclosure of the details of what consideration the board or Lazard gave to SeraCare’s net operating losses.”
A. The Disclosure of Free Cash Flows
“In the recent Nighthawk case, Vice Chancellor Laster plainly found that, unlike a situation where the board provides free cash flow projections to its financial advisor, where the advisor derived the projections on its own, those projections do not have to be disclosed. To me, this is consistent with the principle that the board need not disclose every piece of information used by its financial advisor, such that an investor could conduct its own fair value analysis using that same data.”
B. Net Operating Losses
“As far as the net operating losses, the actual net operating losses have been disclosed. The plaintiffs instead seek details, disclosure details, to the stockholders of how the company expects that net operating loss carry-forward to be used in the future. In the Micromet case, Vice Chancellor Parsons unequivocally found that this exact information was, I quote, “a level of granular disclosure not required under our law.”
Now, the plaintiffs point out Micromet was a decision on preliminary injunction and not at the stage that we are of an expedition motion. But the Vice Chancellor’s statement was an articulation of the law, not a finding of whether the plaintiffs had met its burden under the reasonable likelihood standard for preliminary injunction, which is, indeed, different from the colorable expedition standard. The net operating losses have been disclosed. The stockholders thus have sufficient information to evaluate the proposed deal in light of the existing net operating losses.”
C. Other Disclosure Claims
“Now, there are other disclosure claims that weren’t advanced at oral argument. They’re numerous, but to me they’re unconvincing. This Court, like most courts, draws a line at materiality. Objections to the number of comparables used and requests for additional information regarding details of deals that were never consummated or proposed, as sought here, do not meet the requirement in this case.”
Financial Advisor Flipped Sides
“I now turn to, to me, what is the most difficult aspect of the plaintiffs’ motion to expedite, and that involves the role of William Blair. The plaintiffs assert that the retaining of William Blair by Linden tainted the sales process against the interest of the SeraCare stockholders. Admittedly, William Blair’s involvement on the stockholder side in the earlier sale process and the short time between its separation with SeraCare and its advisement of Linden in the deal at issue imbues this case with –what I can charitably describe as — an odd flavor.
Upon consideration, however, I am unable to envision a scenario in which the information obtained by William Blair in its earlier advisement of SeraCare would provide Linden with a material advantage over the other bidders such that it would be unable to obtain — excuse me — such that it would be able to obtain a lower and unfair merger price. Importantly, neither can the plaintiffs, or at least they were unable to articulate such a scenario at oral argument. If the plaintiffs had alleged a colorable scenario, that the involvement of William Blair harmed the stockholders in a way remediable by injunctive relief, I would not hesitate to order expedition here and quickly take this case to a preliminary injunction hearing. But that is simply not this case.
I note that defense counsel also represented that no fee tail arrangement exists in this case with Blair, and counsel offered to supplement the record with an affidavit to that effect.”