The Duty of Disclosure: No Right to Remain Silent

At a Glance

• The “duty of disclosure,” sometimes called the “duty of candor,” is a critical facet of corporate directors’ obligations under Delaware law, particularly in the context of soliciting stockholder action. For example, in M&A transactions, directors may be required to disclose background information of a transaction or potential conflicts of interest. This guide provides a comprehensive summary of the duty of disclosure, the materiality standard, areas of litigation focus, and practical guidance for directors seeking to comply with their fiduciary obligations.

Fiduciary Foundations: Duty of Disclosure

The duty of disclosure is not a standalone obligation but derives from the directors’ overarching duties of care and loyalty. When directors seek stockholder action (e.g., seeking stockholder approval of a merger), they are obligated to make full and fair disclosures of all material information within their control.¹

The duty aims to ensure that stockholders can make informed decisions, such as whether to accept merger consideration or exercise appraisal rights. Directors must disclose all material facts (defined below) that a reasonable investor would find significantly alter the “total mix” of available information. Omitting such facts may constitute a breach of fiduciary duty. At the same time, directors are not required to engage in “self-flagellation.”²

Directors may delegate aspects of disclosure preparation to management or committees but cannot abdicate final responsibility. A recent Delaware Chancery Court decision (In re Pattern Energy Grp. Inc. S’holders Litig., 2021 WL 1812674 (Del. Ch. May 6, 2021)) found that total delegation of the preparation of a merger proxy statement to conflicted management — without oversight or review — could support a claim of bad faith and breach of the duty of loyalty. To protect itself, the board should maintain meaningful oversight over the disclosure process and ensure that board minutes reflect active involvement and review. 

The Materiality Standard

For a fact to be material, the omitted information must have a substantial likelihood of being viewed by a reasonable stockholder as significantly altering the total mix of information available.³ Not every detail must be disclosed — courts have cautioned against the notion that increasingly detailed disclosure is always beneficial. 

The board is not required to disclose information just because it might be helpful, nor is it required to draw legal conclusions about possible wrongdoing merely to comply with disclosure duties.

Likely Theories for Disclosure Litigation

Stockholder plaintiffs commonly bring claims alleging material omissions in the following areas:

Management Projections

• Delaware law does not require disclosure of all financial projections, especially if they are speculative, unreliable, or not relied upon by the financial advisor. 
• But financial projections made in the ordinary course of business and used by financial advisors are typically considered reliable and should be disclosed if relied upon.⁴
• The failure to disclose financial projections may be considered a material omission depending on the specifics.⁵
• And selective disclosure of only some projections can be misleading, causing courts to find that the partial disclosure was inadequate if omitted information would be material to a reasonable stockholder. 

Financial Advisor Compensation and Conflicts

• Full disclosure of investment banker compensation and potential conflicts is generally required.⁶
• Such a disclosure is especially important when the advisor is providing financing to the buyer because investment banks play a “central role” in the “evaluation, exploration, selection, and implementation of strategic alternatives.”⁷

Merger Sale Process

• While a detailed “blow-by-blow” account of the negotiation process is not required, once the board makes a partial disclosure, it has a duty to provide a complete and fair characterization of the disclosed facts.⁸
• Voluntary disclosures must not be misleading through omission or selective presentation of facts.⁹
• Material information related to an officer’s participation and personal motivation in the sale process should be disclosed.¹⁰
• A duty of disclosure could be necessary for “extraordinary events” such as a fiduciary’s unilateral taking of minority units in a merger.¹¹
• When a merger will trigger appraisal rights, directors still have a duty to disclose even when they are not soliciting stockholder votes.¹²
• Directors have a duty to provide stockholders with sufficient time to take the disclosed information into account.¹³

Director Removal and Nominations

• The solicitation for the nomination or removal of a director may require disclosing the extent of other individuals’ involvement in the process.¹⁴

Practical Guidance for Directors

Directors seeking to satisfy their duty of disclosure should:

• Identify material information. Consider what a reasonable investor would find important when making a voting or investment decision.
• Monitor conflicts. Disclose all conflicts of interest, both within the board and among advisors. Ensure that compensation arrangements and potential conflicts are clearly explained to stockholders.
• Oversee the process. Maintain board-level oversight of the disclosure process. Delegation is permitted, but final authority and review must rest with the board.
• Document deliberations. Board minutes should reflect active engagement, review, and approval of disclosure materials.
• Respond to red flags. Act in good faith to investigate and address any issues regarding disclosure credibility, completeness, or accuracy.
• Avoid over-disclosure. Focus on what is material, avoiding unnecessary detail that could obscure key facts or mislead through selective presentation.
• Stay informed on legal standards. Regularly consult legal counsel to ensure compliance with evolving disclosure standards — especially after significant judicial decisions. 

Conclusion

The duty of disclosure is an evolving, fact-specific obligation grounded in the fundamental duties of care and loyalty. Delaware courts continue to refine the contours of this duty, balancing the need for meaningful, material disclosure against the risks of over-disclosure. Directors who maintain active oversight, focus on materiality, and document their processes are best positioned to satisfy their fiduciary obligations and withstand judicial scrutiny.