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Litigation

: Delaware Corporate and Commercial Litigation Blog

Chancery Court Grants Motion to Expedite Case Based on Allegations of Colorable Disclosure Claim and Threatened Irreparable Injury Regarding Treatment of Stock-Based Compensation Expense

By Francis G. X. Pileggi, Esq.

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In Laborers Local 235 Benefit Funds v. Starent Networks, Corp., et al., C. A. No. 5002-CC (Del. Ch. Nov. 18, 2009), read letter decision here, the Court granted plaintiff's motion to expedite this matter based on the stock based compensation expense disclosure claim.

Kevin Brady, a highly regarded Delaware litigator, provided the synopsis for this decision.

The Court noted that '[t]o achieve expedition in this Court, a movant must establish a 'sufficiently colorable claim and show[] a sufficient possibility of a threatened irreparable injury.'' (citing Giammargo v. Snapple Beverage Corp., 1994 Del. Ch. LEXIS 199, at *6 (Del. Ch. Nov. 15, 1994). 'Under Delaware law, nearly all disclosure violations are per se irreparable harm because the harm arising from the un- or misinformed transaction is of a nature where the injury cannot be compensated adequately in damages. (citing Alpha Builders, Inc. v. Sullivan, 2004 Del. Ch. LEXIS 162, at *19 (Del. Ch. Oct. 5, 2004)).'

Here, Plaintiff alleged, among other things, an inconsistency in defendants' treatment of the stock based compensation expense in the Proxy Statement with respect to two of the several valuation methodologies -- one which treated treat stock-based compensation traditionally as a non-cash expense and the discounted cash flow analysis which treated it as a cash expense (which would result in a lower valuation range.)

The Court found that although 'there may be a valid reason for the treatment of the stock-based compensation in the discounted cash flow analysis, that this detour is not disclosed or otherwise highlighted in the relevant proxy statement section gives me pause.' Moreover, this disclosure claim 'threatens irreparable harm by omitting material information or by misleading stockholders regarding information that a reasonable investor would want to know before making a decision.' As a result, the Court granted the motion to expedite the discovery and set trial for December 3, 2009.

Full post as published by Delaware Corporate and Commercial Litigation Blog on November 21, 2009 (boomark / email).