In In re CheckFree Corporation Shareholders Litigation, No. 3193-CC (Del. Ch. Nov. 1, 2007), Delaware Chancellor Chandler denied plaintiff shareholders’ motion to preliminarily enjoin a merger between CheckFree Corporation and Fiserv, Inc.  In his opinion, Chancellor Chandler held that while “directors have a duty to disclose all material information in their possession to shareholders when seeking shareholder approval for some corporate action,” that duty does not go so far as to require disclosure of all of the internal projections prepared by management of the target corporation that were shared with the acquirer and the target’s financial adviser.  In addition, Chancellor Chandler noted that “the public interest requires an especially strong showing” by a shareholder plaintiff of a likelihood of success on the merits and a threat of irreparable harm where the transaction sought to be enjoined is “a premium transaction in the absence of a competing bid.”  The CheckFree decision largely reaffirms settled Delaware law on these and other issues, while sending a strong signal to the plaintiffs’ bar that shareholder plaintiffs face a very high burden when challenging “a premium transaction in the absence of a competing bid.”

In this class action brought by shareholders of CheckFree, plaintiffs alleged that the company’s proxy statement failed to satisfy disclosure obligations for several reasons.  Plaintiffs focused largely on the proxy statement’s alleged failure to disclose complete details about management’s internal projections upon which the company’s financial adviser had relied in formulating its fairness opinion.  Plaintiffs moved for a preliminary injunction to stop the merger unless and until additional and corrective disclosures were made.

Chancellor Chandler denied plaintiffs’ motion for a preliminary injunction.  The Chancellor characterized as “misplaced” plaintiffs’ reliance upon the Court’s recent decision in In re Netsmart Technologies, Inc. Shareholders Litigation, 924 A.2d 171 (Del. Ch. 2007), for the proposition that CheckFree is required to disclose all of the data underlying the fairness opinion issued by the company’s financial adviser.  Holding that In re Pure Resources, Inc. Shareholders Litigation, 808 A.2d 421 (Del. Ch. 2002), provided the proper analysis for disclosure of financial data in this situation, Chandler found that the proxy statement contained “an adequate and fair summary” of the work CheckFree’s financial adviser did to come to its fairness opinion.

In reaching the conclusion that the proxy statement disclosures were adequate, Chandler considered that the proxy statement “detail[ed] the various sources upon which Checkfree’s financial adviser relied in coming to its conclusions, explain[ed] some of the assumptions and calculations management made to come to its estimates, note[d] exactly the comparable transactions and companies [the financial adviser] used, and describe[d] or otherwise disclose[d] management’s estimated earnings and estimated EBITDA for 2007 and 2008 and a range of earnings derived from management estimates for 2009.”  The disclosures also “explain[ed] that, in tandem with conveying its estimates, management discussed the particular risks it foresaw that might undercut those estimates.”

While there is no “checklist” of the information that must be disclosed relating to an investment bank fairness opinion, Chandler concluded that the disclosure at issue satisfied the Pure Resources standard.  Plaintiffs had failed to explain why information in addition to the basic financial data already disclosed would be material.  The court, therefore, held that plaintiffs failed to demonstrate a likelihood of success on the merits of this or any other aspect of their disclosure claim.

Moreover, in balancing the harms plaintiffs would suffer in the absence of an injunction against the harms defendant would suffer by the issuance of the injunction, Chancellor Chandler explained that an injunction of the merger, rather than avoiding irreparable harm to the company and its shareholders, “would impose significant costs on shareholders of CheckFree in the form of the lost time value of money and lost opportunity costs.”  Because the transaction was a premium transaction in the absence of a competing bid, the court required plaintiffs to meet an especially high burden to support an injunction.

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