No Rummaging Required: Chancery Court Rules Form 10-K Adequate to Discharge Duty of Disclosure When Provided Conspicuously and Concurrently with Stockholder Proxy

By: Joanna A. Diakos and Will Smith

In a memorandum opinion, Samuel Zalmanoff v. John A. Hardy et. al, Civil Action No. 12912-VCS (Del. Ch. November 13, 2018), the Delaware Court of Chancery granted summary judgment in favor of the defendant board of directors of Equus Total Return, Inc. (“Equus”), ruling that the board of directors (the “Board” or “Defendants”) adequately fulfilled their disclosure obligations because the facts allegedly omitted from the operative proxy statement (the “Proxy”) were indisputably contained in the Form 10-K (the “10-K”), which the Board provided to stockholders in the same mailing as the Proxy.

This case arose from the Board’s adoption of an Equity Incentive Plan (the “EIP”), which was overwhelmingly approved by Equus’ stockholders. Plaintiff Samuel Zalmanoff (“Plaintiff”), an Equus stockholder, filed a class action complaint alleging that the Board breached its fiduciary duty of disclosure by omitting material facts and making false and misleading disclosures in the Proxy that Equus filed with the Securities and Exchange Commission to solicit stockholder approval of the EIP.

Defendants moved for summary judgment, contending that the allegedly omitted facts were disclosed to stockholders either in the Proxy or in the 10-K that was mailed to stockholders along with the Proxy. In opposition, Plaintiff argued that the Board was not entitled to rely on disclosures in the 10-K as a matter of law. Plaintiff contended that the Board was obliged to disclose all the material information at issue in the Proxy, or else expressly direct stockholders in the Proxy to consult the 10-K as a supplemental disclosure regarding the EIP.

The Court granted the Defendant’s motion. The Court held that the 10-K, when mailed concurrently with the Proxy, was adequate to discharge the Board’s disclosure obligations to the stockholders as a matter of law. Under these circumstances, the Court ruled that Delaware disclosure law did not require the Board to “repackage and restate information” in a proxy that the Board “simultaneously and conspicuously” provided to stockholders in another public filing.

The Court noted that Wolf v. Assaf, 1998 WL 326662 (Del. Ch. June 16, 1998) was directly on point. Wolf established as a matter of law that including the disclosures in a Form 10-K made a part of the proxy mailing rather than in the proxy statement itself adequately informs stockholders of the material information. Like Wolf, the Court found that Plaintiff was not required to “rummage through” all of Equus’ prior public filings to obtain information that might be material to the requested stockholder action. Instead, the 10-K was expressly referenced in the Proxy’s incorporation by reference clause, and also provided with the Proxy to the stockholders so that it would be a part of the “total mix” to be considered in approving the EIP.