Morrison v. Berry, C.A. No. 1208-VCG (Del. Ch. Dec. 31, 2019) (Glasscock, V.C.)
In this memorandum opinion, the Delaware Court of Chancery dismissed a stockholder’s claims for breach of fiduciary duty against members of a non-party company’s board of directors. In doing so, the Court rejected plaintiff’s novel theory that activist shareholder pressure caused the individual members of the board to act improperly in violation of their fiduciary duty of loyalty. The Court, however, allowed plaintiff to pursue her claims (i) against the chairman of the board, who plaintiff alleged had breached the duty of loyalty, and (ii) the company’s general counsel and former CEO/president, for breach of the duty of care.
The allegations focus on a private equity firm’s (Apollo) acquisition of The Fresh Market, Inc. (“Fresh Market” or the “Company”), a specialty grocery chain. In July 2015, Apollo reached out to Ray Berry, chairman of Fresh Market’s board and a major shareholder, indicating its interest in taking Fresh Market private. But Berry allegedly failed to observe Fresh Market’s communication protocol and did not inform his fellow directors of those communications until September 2015. The board evaluated the proposed Apollo transaction at a special meeting on October 15. Berry claimed he was not involved in crafting Apollo’s proposal, left the meeting, and recused himself from future board meetings. After Berry departed, the board formed a strategic transaction committee to evaluate future proposals.
In response to news leaks concerning Berry’s interests in a buyout the following day, the board publicly announced a review of strategic and financial alternatives. Although multiple suitors expressed interest, the bidding process yielded only one definitive bid—from Apollo for $27.25 per share. Apollo submitted its bid on March 8, 2016, the board determined that it was insufficient the same day, and Apollo submitted a revised offer of $28.50 per share on March 9. The strategic transaction committee recommended that the Board accept the revised offer on March 10. On March 11, the board accepted the offer and approved the merger, and Fresh Market publicly announced the acquisition on March 14. On March 25, Fresh Market publicly filed its Schedule 14D-9, which omitted certain facts about Berry’s communications with Apollo regarding the acquisition.
Plaintiff filed her original complaint alleging breach of fiduciary duty in October 2016. The Court granted defendants’ motion to dismiss, finding that a majority vote of disinterested stockholders approving the merger cleansed any alleged breaches of fiduciary duty. The Supreme Court of Delaware reversed the Court of Chancery’s decision, finding that the shareholder vote was not fully informed such that the business judgment rule applied under Corwin due to material omissions in the Schedule 14D-9. Our summary of that decision is available here. Plaintiff amended her complaint twice after remand, and the Court of Chancery considered dismissal of the claims against defendants with fiduciary duties, reserving judgment on plaintiff’s aiding and abetting claims.
First, the Court noted that the exculpatory provision in the Company’s charter meant the plaintiff had to plead breach of the duty of loyalty by demonstrating that the defendants were interested in the transaction, lacked independence, or acted in bad faith. The plaintiff failed to plead that the director defendants lacked independence. Plaintiff advanced a novel theory for lack of independence: that the sales process was designed to alleviate pressure on the board from shareholder activists and a possible proxy contest that could remove them from their positions. The Court stated that although the board members were under pressure and concerned about their reputations, it would not infer that this pressure caused the board to risk a “far greater blackening of their fiduciary reputations” by participating in a sham sales process and sowing material omissions in Fresh Market’s public filings. The Court also stated that plaintiff did not adequately allege a proxy fight was imminent such that the board member defendants feared removal in the short term.
The Court also held that plaintiff did not adequately allege that the director defendants acted in bad faith. The Court could not reasonably infer that the board’s decision to auction off Fresh Market was in bad faith when major stockholders were urging a sale of the Company, news of a possible sale had leaked to the press, and the Company was in the midst of a public strategic review by the time the board decided to sell. The Court further held that the board’s decision to prevent Berry from communicating with potential bidders was not in bad faith because it was designed to increase the price of the Company. Finally, the Court rejected plaintiff’s allegations that the board members acted in bad faith by failing to adequately oversee their financial advisors and that they omitted material facts from the 14D-9 in an effort to create a misleading document.
Next, the Court allowed claims against Berry to proceed, finding that the complaint adequately alleged that he breached the duty of loyalty. While Berry removed himself from the sales process in October 2015, plaintiff adequately pled that he obfuscated the extent of his communications with Apollo before his removal in a way that was not reasonably motivated by his concern for Fresh Market’s best interests.
Finally, the Court denied the motions to dismiss of Fresh Market’s general counsel and former president/CEO, as the protections afforded by the Company’s exculpatory provision did not apply to them in their capacities as officers. Accordingly, the Court found that plaintiff adequately pled that these individuals acted with gross negligence, in breach of their duty of care and given their knowledge of the sale process, in preparing a 14D-9 that omitted material facts.
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