The Delaware Court of Chancery recently denied a motion to dismiss allowing what it described as a "novel theory" of disclosure violations to proceed.
In New Enterprise Associates 14 LP v. Rich [Fugue], C.A. No. 2022-0406-JTL, private company Fugue undertook a sale process in which no interested buyers were identified. Needing capital, the company engaged in a recapitalization and sale of preferred stock to an investor. Three months after the distressed recapitalization, Fugue received a surprise expression of interest from a potential acquirer for more than ten times the value that was attributed to the company in the recapitalization.
After receiving the offer, and despite having adequate capital, the company engaged in an additional offering of preferred stock at the same price as the recapitalization and issued stock options with an exercise price less than one-tenth of the per-share price of the prior preferred stock issuance. The second preferred stock issuance required a stockholder-approved charter amendment, and the company obtained written consents from a small number of non-board member stockholders.
However, the company did not disclose the second issuance to other stockholders, notwithstanding one institutional investor's contractual right of first offer in any issuance of securities.
The stockholders plaintiffs allege that director defendants breached their duty of disclosure when requesting action from stockholders other than themselves. The Court noted that a claim challenging disclosures provided to other stockholders is novel theory under Delaware corporate law, but concluded such a claim is viable because stockholders who do not act in response to a disclosure violation may be injured by the actions other stockholders were induced to take.