## Facts

- A controlling stockholder controlled Viacom through a voting interest held in its parent entity; Viacom held a controlling equity and voting stake in Blockbuster, a Delaware corporation.
- Viacom pursued a divestiture of most of its Blockbuster interest through two steps: (1) Blockbuster paid a $5-per-share special cash dividend to its stockholders, and (2) Viacom conducted a voluntary exchange offer allowing Viacom stockholders to exchange Viacom shares for Blockbuster shares at a ratio set by Viacom.
- The exchange offer was conducted through an SEC-registered prospectus that disclosed, among other items, that the controlling stockholder would not participate in the exchange offer and that a committee of independent Blockbuster directors evaluated and recommended the transaction terms.
- A Viacom stockholder elected to participate in the exchange offer and received Blockbuster shares.
- After closing, Blockbuster experienced financial difficulties.
- The plaintiff relied on (1) an internal cash analysis prepared by a Blockbuster employee before the transactions, allegedly indicating liquidity constraints, and (2) a later accounting cash-flow reclassification for 2003–2005 that did not change total cash flows or net income.
- The plaintiff filed a putative class action alleging breaches of fiduciary duties (disclosure, loyalty, and care) by directors in connection with the transactions and a duty-of-loyalty breach by the controlling stockholder.

## Issues

1. Whether the complaint pleaded nonconclusory facts supporting a reasonable inference that the prospectus omitted or misstated material information in violation of fiduciary disclosure duties.
2. Whether the complaint pleaded a viable controlling-stockholder loyalty claim based on self-dealing or a non-ratable benefit arising from the transaction structure.
3. Whether any duty-of-care theory was properly presented on appeal as a basis to reverse dismissal.

## Decision

- The Delaware Supreme Court affirmed dismissal under Rule 12(b)(6).
- The court held the plaintiff failed to plead that the challenged alleged omissions or misstatements were material.
- The court rejected the theory that knowledge of an internal cash analysis could be imputed to the Viacom directors through a speculative chain of inferences.
- The court held the later cash-flow reclassification was not pleaded as material, and the complaint did not adequately allege the directors knew (or should have known) of any accounting issue at the time of the offer.
- The court held additional details about the exchange ratio methodology and the committee’s composition were not pleaded as material given the disclosures made.
- The controlling-stockholder loyalty claim failed because the complaint did not plead particularized facts showing a non-ratable benefit or unfair self-dealing; the controller’s nonparticipation in the exchange offer was disclosed.
- Any duty-of-care claim was treated as abandoned because it was not substantively argued on appeal.

## Legal Principles

- A fiduciary disclosure claim requires pleading a materially misleading statement or omission; materiality turns on whether there is a substantial likelihood a reasonable stockholder would view the information as important to the decision at issue.
- Directors are not required to disclose all internal analyses; disclosure duties extend to material information that is reasonably available and necessary to avoid misleading stockholders in light of what was said.
- Plaintiffs must plead non-speculative facts supporting director knowledge (or a basis to infer knowledge) of the allegedly omitted information; conjectural “would have told” chains are insufficient.
- A later accounting reclassification that does not change total cash flows or net income, without more, may be immaterial for pleading purposes as to earlier disclosures.
- A controlling-stockholder loyalty claim requires well-pleaded facts showing self-dealing or a non-ratable benefit at the expense of minority stockholders; disclosure-based theories do not survive if the underlying disclosure claim fails absent independent facts of unfairness.

## Conclusion

The Delaware Supreme Court upheld dismissal of a stockholder class action challenging a dividend-and-exchange-offer divestiture, holding that the complaint did not plead material disclosure violations or a viable controlling-stockholder self-dealing claim and that any duty-of-care theory was not pursued on appeal.


Pfeffer v. Redstone, 965 A.2d 676 (Del. 2009)