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Morrision v. Berry

Supreme Court of Delaware

July 9, 2018

ELIZABETH MORRISION, Individually And on Behalf of All Others Similarly Situated, Appellant, Plaintiff Below,

          Submitted: April 18, 2018

          Case Below: Court of Chancery of the State of Delaware C.A. No. 12808-VCG

         Upon appeal from the Court of Chancery. REVERSED and REMANDED.

          Joel Friedlander, Esquire (argued), Jeffrey M. Gorris, Esquire, and Christopher P. Quinn, Esquire, of Friedlander & Gorris, P.A., Wilmington, Delaware. Of Counsel: Randall J. Baron, Esquire, of Robbins Geller Rudman & Dowd LLP, San Diego, California; Christopher H. Lyons, Esquire, of Robbins Geller Rudman & Dowd LLP, Nashville, Tennessee for Appellant.

          Rudolf Koch, Esquire (argued), Matthew D. Perri, Esquire, and Ryan P. Durkin, Esquire of Richards, Layton & Finger, P.A., Wilmington, Delaware. Of Counsel: Adam L. Sisitsky, Esquire, Lavinia M. Weizel, Esquire, of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C., Boston, Massachusetts; Robert I. Bodian, Esquire, and Scott A. Rader, Esquire, of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C., New York, New York for Appellees Richard A. Anicetti, Michael D. Casey, Jeffrey Naylor, Richard Noll, Bob Sasser, Robert K. Shearer, Michael Tucci, Steven Tanger, and Jane Thompson.

          John L. Reed, Esquire, Ethan H. Townsend, Esquire, and Harrison S. Carpenter, Esquire, of DLA Piper LLP, Wilmington, Delaware. Of Counsel: David Clarke, Jr., Esquire of DLA Piper LLP, Washington, D.C. for Appellees Ray Berry and Brett Berry.

          Before STRINE, Chief Justice; VALIHURA and VAUGHN, Justices.

          VALIHURA, Justice

         This case calls into question the integrity of a stockholder vote purported to qualify for Corwin "cleansing." It offers a cautionary reminder to directors and the attorneys who help them craft their disclosures: "partial and elliptical disclosures"[1] cannot facilitate the protection of the business judgment rule under the Corwin doctrine.[2]

         * * *

         In March 2016, soon after The Fresh Market (the "Company") announced plans to go private, the Company publicly filed certain required disclosures under the federal securities laws.[3] Given that the transaction involved a tender offer, the required disclosures included a Solicitation/Recommendation Statement on Schedule 14D-9 (together with amendments, the "14D-9"), which articulated the Board's reasons for recommending that stockholders accept the tender offer-from an entity controlled by private equity firm Apollo Global Management LLC ("Apollo") for $28.5 in cash per share.[4] The 14D-9 also included a narrative of the events leading up to the transaction, [5] which, in addition to the tender offer, included an equity rollover whereby The Fresh Market's founder, Ray Berry, and his son, Brett-who collectively owned 9.8% of the Company's shares-were to roll over their equity and end up with an approximately 20% stake in the Company upon the closing.[6] As also required under the federal securities laws, [7] Apollo publicly filed a Schedule TO, which included its own narrative of the background to the transaction. The 14D-9 incorporated Apollo's Schedule TO by reference.[8]

         After reading these disclosures, as the tender offer was still pending, stockholder Elizabeth Morrison ("Plaintiff") suspected that the Company's directors had breached their fiduciary duties in the course of the sale process, and she sought Company books and records pursuant to Section 220 of the Delaware General Corporation Law. The Company denied her request, and the tender offer closed as scheduled on April 21 with 68.2% of outstanding shares validly tendered.[9]

         Litigation over the Section 220 demand ensued, and Plaintiff obtained several key documents, such as board minutes and a crucial e-mail from Ray Berry's counsel to the Company's lawyers. Plaintiff then filed this action in the Court of Chancery. It includes a breach of fiduciary duty claim against all ten of the Company's directors, including Ray Berry, and a claim for aiding and abetting the breach against Ray Berry's son, Brett Berry, who did not serve on the Board.[10]

         The thrust of Plaintiff's breach of fiduciary duty claim is that Ray and Brett Berry teamed up with Apollo to buy The Fresh Market at a discount by deceiving the Board and inducing the directors to put the Company up for sale through a process that "allowed the Berrys and Apollo to maintain an improper bidding advantage" and "predictably emerge[] as the sole bidder for Fresh Market" at a price below fair value.[11] Plaintiff also alleges that Ray Berry's commitment to Apollo was not fully disclosed to the Board or to other stockholders, and that the auction that ensued led to a pre-ordained result: Apollo was the winner, with the Berrys participating in an equity rollover. In other words, Plaintiff alleges that the Board and the stockholders were misled into believing that Ray Berry would open-mindedly consider partnering with any private equity firm willing to outbid Apollo, but, instead, "[t]he reality of the situation was that Ray Berry (a) had already formed the belief that Apollo was uniquely well situated to buy Fresh Market; (b) had already entered into an undisclosed agreement with Apollo; and (c) was incentivized not to create price competition for Apollo."[12]

         In moving to dismiss, Defendants argued that Corwin applied. Under that doctrine, the "business judgment rule is invoked as the appropriate standard of review for a post-closing damages action when a merger that is not subject to the entire fairness standard of review has been approved by a fully informed, uncoerced majority of the disinterested stockholders."[13] The Corwin doctrine is premised on the view that, "[w]hen the real parties in interest-the disinterested equity owners-can easily protect themselves at the ballot box by simply voting no, the utility of a litigation-intrusive standard of review promises more costs to stockholders in the form of litigation rents and inhibitions on risk-taking than it promises in terms of benefits to them."[14] The same is true of stockholders deciding whether to tender their shares, and the Corwin doctrine has been extended to these circumstances.[15] However, those same stockholders cannot possibly protect themselves when left to vote on an existential question in the life of a corporation based on materially incomplete or misleading information. Careful application of Corwin is important due to its potentially case-dispositive impact.[16]

         In granting Defendants' motion to dismiss this case, the Court of Chancery stated that this matter "presents an exemplary case of the utility of th[e] ratification doctrine, as set forth in Corwin and Volcano."[17] Respectfully, we disagree.

         Here, Defendants have not shown, as required under Corwin, that the vote was fully informed-especially given that Plaintiff's complaint alleges facts showing that the Company failed to disclose "troubling facts regarding director behavior . . . that would have been material to a voting stockholder."[18] A reasonable stockholder would have found these facts material because they would have shed light on the depth of the Berrys' commitment to Apollo, the extent of Ray Berry's and Apollo's pressure on the Board, and the degree that this influence may have impacted the structure of sale process. Thus, "the business judgment rule is not invoked."[19]

         We REVERSE the Court of Chancery's decision for these reasons and those that follow, and we REMAND this case for further proceedings consistent with this opinion.


         Plaintiff's argument on appeal is straightforward: she contends that the Court of Chancery erred in applying Corwin because an array of alleged deficiencies rendered the 14D-9's disclosures materially incomplete and misleading.[20] A brief overview of the key dates recounted in the 14D-9 is helpful to establish the context of the alleged flaws in the disclosures.

         On October 1, 2015, The Fresh Market received an "unsolicited preliminary non-binding indication of interest" from Apollo to purchase the Company for $30 per share in cash.[21] The letter stated that Apollo had discussed an equity rollover with the Berrys and had an "exclusive partnership" with them.[22] On October 15, the Company's Board convened a meeting to review the proposal and plan its course of action. The directors authorized the formation of a Strategic Transaction Committee (the "Committee"), and they specifically asked Ray Berry if he had an agreement with Apollo. Ray Berry denied that he did, and he recused himself from the meeting "so that the members of the Board could engage in a discussion without him present."[23] Following that meeting, Ray Berry recused himself from Board meetings through the date the Company entered into the merger agreement.[24]

         In a letter dated as of that date, October 15, 2015, Apollo stated that its proposal would expire on October 20, and, on October 21, the firm formally withdrew it. But, on November 25, Apollo reaffirmed the same proposal and again stated that it "was making the proposal together with Ray Berry and Brett Berry."[25] The Company's lawyers wrote Ray Berry's counsel seeking clarity on Ray Berry's status with Apollo. Ray Berry's counsel responded by e-mail on November 28 (the "November 28 E-mail").[26] That e-mail referred to an agreement that Ray Berry had with Apollo in October-an agreement that can rationally be seen as contrary to Ray Berry's representation to the Board on October 15 that he had no such agreement. The sale process officially began on December 3, the day after the conclusion of a two-day Board meeting.[27]

         Plaintiff identifies a number of problems that allegedly render the 14D-9 materially misleading, including the following four:

         First, the November 28 E-mail from Ray Berry's counsel reveals that Berry had an agreement with Apollo as of October, and that revelation must have suggested to the Board that Berry had not been forthcoming as he previously had denied the existence of an agreement. But, because the 14D-9 never disclosed this information, the 14D-9 omitted material information or was misleading.

         Second, Ray Berry's statements expressing a clear preference for a rollover transaction involving Apollo-and reluctance to engage in such a transaction if another buyer were to prevail-were material, and these statements were never disclosed to stockholders. In fact, the 14D-9 disclosures implied otherwise-i.e., that Ray Berry was willing to partner with a party other than Apollo.

         Third, the 14D-9 never disclosed a "threat" contained in the November 28 E-mail- that Ray Berry would sell his shares if the Board did not undertake a sale process.

         Fourth, Plaintiff also alleges that the Board misrepresented the reasons that the Board formed the Committee tasked with overseeing a sale process because the 14D-9 failed to state that the directors were motivated by existing activist pressure.

         Though Plaintiff challenges the adequacy of other disclosures, such as those concerning the management projections reviewed by the Board, we need not consider them here given that the aforementioned deficiencies in the disclosures prove sufficient to deny Corwin "cleansing."

         A. Plaintiff alleges serious misrepresentations-both to the Board, and to stockholders-about Ray Berry's "agreement" with Apollo.

         The November 28 E-mail indicates that Ray Berry had agreed as early as October that, if Apollo reached a deal with the Board to purchase the Company, he would roll over his equity interest. But the 14D-9 never mentioned the October agreement and even suggested that, to the contrary, none ever existed.[28] And the Company's Board minutes show that Ray Berry also never disclosed this "agreement" to his fellow directors, even when he was asked directly about his arrangement with Apollo at the October 15, 2015 Board meeting. Plaintiff alleges that the omission of the November 28 E-mail's revelation of an October agreement (the "Agreement Omission") is material "not only in substance but also because it shows that Ray Berry was lying to the Board, the Board was on notice that Ray Berry was lying to them and the Board did nothing to address it."[29]

         The following chart compares the 14D-9's summary of the November 28 E-mail with the actual e-mail. Italicized words indicate portions omitted from the 14D-9.

14D-9 [30]

November 28 E-Mail [31]

Berry's counsel . . . stated that since [Apollo's] earlier offer had expired on October 20, 2015, Mr. Berry had engaged in one conversation with [Apollo], and during that conversation he had agreed that he would roll his equity interest over into the surviving entity if [Apollo] were to be successful in agreeing to a transaction with TFM. [32]

Since Apollo withdrew its earlier offer in October, Mr. Berry has had one conversation with Apollo. During that conversation, he agreed, as he did in October, that, in the event Apollo agreed on a transaction with TFM, he would roll his equity interest over into the surviving entity. Apollo determined the price that was offered.

         Plaintiff alleges that the exclusion of "as he did in October" from the 14D-9 is a material omission not just on its own, but because it undermines the veracity of other statements that Berry had made to both the Company's general counsel and its Board. For example, the 14D-9 states that, on October 5, 2015, Ray Berry told the Company's general counsel that he had told Apollo that he "would consider an equity rollover depending upon the terms . . . ."[33] But the 14D-9 omits reference to any agreement to engage in an equity rollover as of that time. In fact, the 14D-9 also states that Berry even told the general counsel that "he had not been involved in [Apollo's] formulation of its proposal, he had not committed to any participation in a transaction with [Apollo] (or any other potential buyer) and he was not working with [Apollo] on an exclusive basis."[34] And, when the Board convened its telephonic meeting on October 15, Berry "reiterated that he had not committed to any transaction with [Apollo] (or any other potential bidder)," as recounted in the 14D-9.[35]

         Moreover, even if the Schedule TO is also considered to be part of the "total mix" of information disclosed to stockholders, as the Director Defendants urge, any impression of an agreement is undermined by the 14D-9's suggestions to the contrary. The Schedule TO discloses that Apollo called the Berrys just before the submission of its October 1 proposal "to confirm whether they would participate in such a transaction, "[36] and states that the Berrys "indicated they were interested"-albeit with a caveat that they needed flexibility and Board approval.[37] In contrast, though the 14D-9 references several conversations that Ray Berry had with Apollo before its submission of the October 1 proposal, it undermines any impression one might get of an agreement by describing Apollo's last pre-October 1 call as a "courtesy call" in which Apollo stated that it would be submitting an offer.[38]

         Moreover, the 14D-9 omits any mention of Brett Berry in its description of Apollo's pre-October 1 contacts with Ray Berry-allegedly because a reference to these discussions would bolster the impression of an agreement among Apollo, Ray Berry, and Brett Berry.[39] Nor does it disclose that, at the October 15, 2015 Board meeting, Ray Berry told the directors that he "was not aware of any conversation that may or may not have occurred with Apollo and Brett Berry."[40] Plaintiff alleges that, given that the Schedule TO suggests that Ray Berry was in fact aware of such conversations, [41] this omission is material because, if revealed, it would have informed stockholders that the Company's directors "blinded themselves to the reality of the joint plan among Apollo, Ray Berry and Brett Berry."[42]Moreover, even if Ray Berry and the 14D-9's statement that he "had not been involved in [Apollo's] formulation of its proposal"[43] were literally true, Plaintiff alleges that it is misleading because it omits that he was involved by providing indications of his interest and directing the Apollo senior partner, Andrew Jhawar, to contact Brett Berry to explore "various structural alternatives for an equity rollover transaction," and Jhawar and Brett Berry then "had several communications regarding potential transaction structures."[44]

         B. Plaintiff alleges that the 14D-9 misled stockholders about Ray Berry's clear preference for Apollo.

         Plaintiff alleges that the 14D-9 misleadingly conveys an impression that Berry would open-mindedly consider offers from a potential purchaser other than Apollo. The narrative in the 14D-9 fails to mention that Ray Berry divulged to the Board his clear preference for Apollo and reluctance to consider bids from other prospective purchasers.

         For example, the 14D-9 states that, at the October 15 Board meeting, Berry told the directors that "he had communicated to [Apollo] that he would only participate in a transaction that was supported by the Board and that he would also be willing to sell his shares to any potential purchaser for cash in a Board-supported transaction."[45] But the 14D-9 never mentions that, in response to a question from the Company's outside counsel, Cravath, Swaine & Moore LLP, as to whether "he would be willing to participate in an equity rollover with another party were the Corporation to engage in [a] sale transaction with a party other than Apollo," Ray Berry also told the Board that "he was not aware of any other potential private equity buyer that had experience in the food retail industry with whom he would be comfortable engaging in an equity rollover."[46] A fair implication of this statement in the minutes is that, while Ray Berry would be willing to consider selling his shares to another private equity buyer for cash, he would not engage in an equity rollover with a party other than Apollo. But the 14D-9 never discloses that fact.

         The November 28 E-mail further suggests Ray Berry's resistance to participate in an equity rollover with a non-Apollo party, but the 14D-9's account never mentions that resistance in its summary. Again, a comparison between the disclosure of the November 28 E-mail and the November 28 E-mail itself is illustrative. (Italicized words indicate substantive information omitted.)

14D-9 [47]

November 28 E-Mail [48]

Mr. Berry's counsel also said that in the event that another buyer, and not equity funds managed by [Apollo], were to acquire TFM, Mr. Berry would also consider rolling his equity interest over in such a transaction.

Should Apollo not be successful in its bid, Mr. Berry would consider rolling his equity interest over in connection with an acquisition of TFM by another buy-out firm that successfully bids for the company, provided he has confidence in its ability to properly oversee the company. As he mentioned to the board of directors in October, however, he believes that Apollo is uniquely qualified to generate value because of its recent success in TFM's space with the acquisition of Sprouts.

         Whereas the 14D-9 states that Ray Berry was willing to consider an equity rollover with a party other than Apollo, Plaintiff alleges that the omitted portion suggests that the opposite is the case: that he would be willing to consider such an equity rollover only if he "has confidence in [the firm's] ability to properly oversee the company," and he only had confidence in one party, namely, Apollo.[49] If, as Plaintiff fairly alleges, Ray Berry were only willing to consider an equity rollover with a qualified party, and Apollo was "uniquely qualified," then Ray Berry was not, in fact, willing to consider an equity rollover with another party.

         C. Plaintiff alleges that the 14D-9 failed to disclose Ray Berry's "threat" to sell the Company.

         Plaintiff alleges that the November 28 E-mail reveals that the 14D-9 is marred by another material omission: the 14D-9 never mentions that Ray Berry's counsel emphasized his client's belief that the Company needed to go private and that, if it stayed public, Ray Berry would sell his shares. Specifically, Berry's attorney stated in the November 28 Email that Ray Berry believed it was "in the best interests of the shareholders for the board to pursue a sale of the company at this time due to the low valuation of the company in spite of a built-in buy-out premium as well as the complexity of implementing the changes [new CEO] Rick Anicetti covered in the earnings release while under the scrutiny of the public market."[50] But the 14D-9 does not include anything resembling a summary of that assertion. Berry's counsel stated further that, "If The Fresh Market remains public, Mr. Berry will give serious consideration to selling his stock when permitted as he does not believe TFM is well positioned to prosper as a public company and he can do better with his investment dollars elsewhere."[51] Again, this assertion is missing from the 14D-9.

         D. Plaintiff alleges that the 14D-9 misled stockholders about the Company's reasons for forming the Strategic Transaction Committee.

         Plaintiff alleges that the 14D-9 misled stockholders concerning existing activist stockholder pressure facing the Company at the time of the October 15, 2015 Board meeting, when the directors decided to form the Strategic Transaction Committee. The 14D-9 states that the Board decided to form the Committee in order "to enhance efficiency in light of the fact that TFM could become the subject of shareholder pressure and communications and potentially additional unsolicited acquisition proposals in light of TFM's recent stock performance."[52] It fails to mention that the Company had already become subject to stockholder pressure and that the Board considered that fact when deciding to form the Committee. According to the minutes of the October 15 meeting, the Board discussed "that there had been a significant amount of shareholder outreach recently regarding the strategic direction of the Corporation in light of the Corporation's performance and the trends facing the industry."[53] In particular, the directors addressed a letter dated October 8, 2015, from activist investor Neuberger Berman LLC, which owned 3.4% of the Company's shares.[54] The letter listed grievances with The Fresh Market's performance and proclaimed that "urgent action is necessary to restore credibility and prevent further damage to this asset base."[55] Neuberger stated that "it is now time" for the Board "to initiate a comprehensive strategic review" and "consider in that review hiring outside financial advisers to assess: (i) a sale of the Company, (ii) possible strategic partnerships, joint ventures, or alliances, or (iii) other possible internal investments or external transactions."[56]


         Reviewing the Court of Chancery's decision to dismiss the complaint de novo, [57] we reverse because Defendants did not meet their burden for triggering application of the business judgment rule under Corwin.[58]

         We focus on whether the stockholder vote was fully informed-that is, whether the Company's disclosures apprised stockholders of all material information and did not materially mislead them.[59] At the pleading stage, that requires us to consider whether Plaintiff's complaint, when fairly read, supports a rational inference that material facts were not disclosed or that the disclosed information was otherwise materially misleading.[60]

         "An omitted fact is material if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote."[61] Framed differently, an omitted fact is material if there is "a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the 'total mix' of information made available."[62] But, to be sure, this materiality test "does not require proof of a substantial likelihood that disclosure of the omitted fact would have caused the reasonable investor to change his vote."[63]

         Just as disclosures cannot omit material information, disclosures cannot be materially misleading. As we said in Arnold v. Society for Savings Bancorp, Inc., [64] "once defendants traveled down the road of partial disclosure of the history leading up to the Merger . . . they had an obligation to provide the stockholders with an accurate, full, and fair characterization of those historic events."[65] And, in Zirn v. VLI Corp., [66] we explained that, "even a non-material fact can, in some instances, trigger an obligation to disclose additional, otherwise non-material facts in order to prevent the initial disclosure from materially misleading the stockholders."[67]

         Here, the Court of Chancery stated that, if the Plaintiff could adequately allege in her pleadings that "the apparent robustness of the auction was a sham" and "[Ray] Berry had already made up his mind that he wished Apollo to be the acquirer and only Apollo had a shot at winning the auction," then "surely the disclosures were flawed and inadequate to allow the vote to serve as a ratification of the Defendants' actions."[68] But the trial court rejected Plaintiff's argument because it found "the facts regarding Berry's involvement with Apollo were disclosed" and, thus, "[t]he conclusion that the Plaintiff reaches-that the auction was a sham-is not supported by the record."[69] Respectfully, we disagree.

         Plaintiff has unearthed and pled in her complaint specific, material, undisclosedfacts that a reasonable stockholder is substantially likely to have considered important in deciding how to vote.[70] We believe a reasonable stockholder likely would find such information important because it would have helped the stockholder to reach a materially more accurate assessment of the probative value of the sale process. These facts include "troubling facts regarding director behavior, "[71] and thus we conclude ...

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