Morrison v. Berry, No. 445, 2017 (Del. July 27, 2018) (Valihura, J.)
In this decision, the Delaware Supreme Court reversed the Court of Chancery’s dismissal of a stockholder challenge to a going private merger, which was based on a claim that material information was excluded from a Schedule 14D-9 Solicitation/Recommendation Statement (the “14D-9”). Specifically, the Court held that the Company failed to disclose troubling facts that “shed light on the depth of  commitment” of the founder to the private equity firm that purchased the company. This relationship, the Court concluded, may have placed pressure on the board that “may have impacted the structure of the sale process.”
In October 2015, The Fresh Market (the “Company”) received an unsolicited preliminary non-binding indication of interest to purchase the Company for $30 per share in cash from Apollo, a private equity firm. The indication of interest stated that Apollo had an exclusive partnership with the founder of the Company. The Company’s Board met to review the proposal and authorized a Strategic Transaction Committee (the “Committee”). At the formation of the Committee, the Board explicitly asked the founder if he had an agreement with Apollo, to which the founder responded no. The founder recused himself from that meeting, and all future Board meetings until the Company entered into the merger agreement.
Apollo withdrew its proposal after a lapsed deadline in October 2015, but reissued the proposal in November 2015. The reissued proposal stated that the transaction was being pursued by Apollo alongside the founder. In response, the Company’s lawyers emailed the founder’s counsel, seeking clarity on the new proposal and the founder’s status with Apollo because the proposal seemed to contradict his statements at the Board meeting in October 2015. The reply email referred to an agreement between the founder and Apollo in October, contradicting the founder’s prior statements to the Board. The sale process, nonetheless, began in December 2015 and concluded in March 2016 with an agreement to sell the Company to Apollo, a two-step tender offer/merger process.
The Company filed its 14D-9 in March 2016. After the filing, the Plaintiff demanded books and records under Section 220, but the Company denied her request. The tender offer subsequently closed in April 2016.
The Plaintiff brought a Section 220 action in the Court of Chancery where she obtained documents, including a damaging November 2015 email. Plaintiff then sued, identifying several problems that rendered the 14D-9 materially misleading, including:
- The November 2015 email contradicted the founder’s representations to the Board in October 2015 concerning his relationship with Apollo;
- The founder’s omitted “statements expressing a clear preference” for a deal with Apollo and “reluctance” to deal with another buyer;
- The November 2015 email contained a threat that the founder “would sell his shares” if the Board refused to start a sale process; and
- The Board “misrepresented the reasons the Board formed the Committee, because the 14D-9 failed to state the directors were motivated by existing activist pressure.”
Defendants moved to dismiss, claiming that the transaction was “cleansed” under Corwin v. KKR Fin. Holdings LLC. The Court of Chancery agreed, and held that Plaintiffs complaint had to be dismissed because the facts regarding the founder’s involvement with Apollo were disclosed, and thus the auction was not a sham.
Reviewing that decision de novo, the Supreme Court held that the Court of Chancery erred in applying the business judgment rule because Defendants did not meet their burden under Corwin.
The Court explained that, at the pleading stage, Corwin doctrine “requires [the Court] 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.” And that, “[a]n 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.” The materiality test, however, “does not require proof of a substantial likelihood that disclosure of the omitted fact would have caused the reasonable investor to change his vote.”
The Court further explained that, “just as disclosures cannot omit material information, disclosures cannot be materially misleading.” And that, “[e]ven a non-material fact can, in some instances, trigger an obligation to disclose additional, otherwise non-material facts, in order to prevent misleading the stockholders.”
The Court determined that the Complaint satisfied the pleading standard, finding that Plaintiff “unearthed and pled in her complaint, specific, material, undisclosed facts, that a reasonable stockholder is substantially likely to have considered important in how to vote.” The Court further explained that stockholders would have found such material “important because it would have helped the stockholder to reach a materially more accurate assessment of the probative value of the sales process.” Moreover, there was “a substantial likelihood that [full disclosure] would have altered the total mix of information available to the stockholders.”
The Court reiterated its recent decision in Appel v. Berkman, indicating that full disclosure is required before Defendants may avail themselves of the business judgment rule under the Corwin doctrine. The Supreme Court reversed and remanded the case to the Court of Chancery for proceedings consistent with its opinion.