In its recent decision in Morrison v. Berry, 191 A.3d 268 (Del. 2018), the Delaware Supreme Court (the “Court”) reiterated the importance of complete and accurate disclosures to stockholders in all public filings related to a transaction in order for the target company’s board to be afforded the protection of the business judgment rule. The decision highlighted that public disclosures made in connection with a transaction must be consistent with board materials, emails and other information that may be produced in connection with a stockholder’s demand to examine corporate records under Section 220 of the Delaware General Corporations Law (“Section 220”). Further, the Amended Complaint filed subsequent to the decision demonstrates that when a plaintiff has the benefit of additional discovery after a court rejects the application of the business judgment rule, legal and financial advisors face a heightened risk of liability for aiding and abetting violations of fiduciary duties.
Under the Corwin doctrine, a transaction entered into by a Delaware corporation is reviewable under the business judgment rule if it has been approved by a fully informed, uncoerced majority of the disinterested stockholders of a corporation.1 Since Corwin was decided in 2015, subsequent decisions by the Court have refined the requirements and limited the applicability of Corwin. In Morrison, the Court reversed the Delaware Court of Chancery’s (“Court of Chancery”) dismissal of a suit arising out of the sale of Fresh Market Inc. (“Fresh Market” or the “Company”) based on its application of Corwin, finding that the board of directors failed to show that the vote by the stockholders was fully informed.2
Apollo Global Management, LLC (“Apollo”) acquired Fresh Market in 2016. As a part of the transaction, Fresh Market founder Ray Berry and his son, Brett Berry, rolled over their equity. After reviewing the publiclyfiled disclosures related to the transaction, stockholder Elizabeth Morrison (“Plaintiff”) requested the Company’s books and records pursuant to Section 220 in connection with what she believed to be a breach of fiduciary duties by the Company’s directors. Fresh Market denied the request, but Plaintiff was able to obtain board minutes, emails and other related documents through the Section 220 litigation process. The documents obtained through the Section 220 litigation, including an email from Ray Berry’s counsel to the Company’s lawyers that indicated that Ray Berry would be unlikely to work with a firm other than Apollo and referred to an agreement that Ray Berry had with Apollo in October 2015 (the “November 28th Email”), that formed the basis for Plaintiff’s complaint in her claim for breach of fiduciary duty.3
The Plaintiff made four main allegations based on the board minutes and emails that were produced during discovery in the Section 220 litigation. The Plaintiff alleged that: (i) based on the November 28th Email, Ray Berry misrepresented the nature and timing of his agreement with Apollo to Fresh Market’s board of directors; (ii) the Schedule 14D-9 filed by the Company was misleading with respect to Ray Berry’s clear preference to enter into a transaction with Apollo based on information found in board meeting minutes; (iii) the 14D-9 filed by the Company failed to disclose the threat made by Ray Berry in the November 28th Email to sell his stock if the Company was not sold; and (iv) the 14D-9 filed by the Company misled stockholders about the Company’s actual reasons for forming a strategic transaction committee.4 While the Court of Chancery rejected each of the above claims in kind before applying the Corwin doctrine and dismissing the suit, the Court strongly disagreed, leading its opinion by stating:
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” cannot facilitate the protection of the business judgment rule under Corwin. 5
Ultimately, the Court found that “Plaintiff has unearthed and pled in her complaint specific, material, undisclosed facts that a reasonable stockholder is substantially likely to have considered important in deciding how to vote.”6 Such a finding is sufficient to deny “cleansing” under the Corwin doctrine.
The Court further held that Plaintiff adequately alleged material omissions in the 14D-9 concerning Ray Berry’s “agreement” with Apollo and relationship with the firm.7 The 14D-9 summarized the November 28th Email but left out material portions indicating that Ray Berry and Apollo had an agreement in place in October of that year. Further, the missing portion of the email conflicted with Ray Berry’s statement at the October 15th board meeting that “he has not committed to any transaction with Apollo.” The Court agreed with Plaintiff that the omission of the portion of the November 28th Email suggesting an agreement was in place in October was material for two reasons: (i) “[a] reasonable stockholder would want to know the facts showing that Ray Berry has not been forthcoming with the Board about his agreement with Apollo . . . as directors have an ‘unremitting obligation’ to deal candidly with their fellow directors;” and (ii) “a reasonable stockholder would want to know about this level of commitment to a potential purchaser, in the context of this deal.”8 The Court further noted that the 14D-9’s failure to mention Brett Berry, who was also heavily involved in pursuing a rollover transaction with Apollo, “supports a pleading stage inference that the 14D-9 is so committed ‘to the false proposition that Ray Berry, Brett Berry and Apollo were not acting pursuant to a plan’ that it presents a distorted narrative.”9
The Court also found that Plaintiff “adequately alleges that the 14D-9 is materially misleading about Ray Berry’s clear preference for Apollo and willingness to consider an equity rollover.” Continuing the trend, the 14D-9 includes statements indicating Ray Berry’s willingness to consider an equity rollover with other bidders, while omitting statements suggesting that the contrary is true.10 The court stated that: “Directors cannot fulfill their disclosure obligations through such partial disclosure – that is, where material facts are either not disclosed or ‘presented in an ambiguous, incomplete, or misleading manner.’ Stockholders are ‘entitled to a balanced and truthful recitation of events, not a sanitized version that is materially misleading.’”11
The Court of Chancery found the allegation that Ray Berry’s “threat” to sell his shares was material and should have been disclosed in the 14D-9 to be the most credible argument made by the Plaintiff, but ultimately dismissed it because “it would not have made investors less likely to tender if they knew that a large blockholder – the founder – was considering a sale if the deal was not consummated.”12 The Court held that the Court of Chancery used an improper test, clarifying that information is material and requires disclosure even if it makes a stockholder more likely to tender shares. To highlight the point, the Court stated that any “[o]mitted information is material if there is a substantial likelihood that a reasonable stockholder would have considered the omitted information important when deciding whether to tender her shares or seek appraisal.”13
Finally, the Court held that Plaintiff had adequately alleged that the 14D-9’s presentation of the Board’s reasons for forming the Strategic Transaction Committee were materially misleading. Again, the Court made it clear that the information disclosed by the Company must be clear and accurate. Here, the 14D-9 disclosed that “the board decided to create the [c]ommittee ‘to enhance efficiency in light of the fact that [Fresh Market] could become the subject of shareholder pressure and communications and potentially additional unsolicited acquisition proposals in light of [Fresh Market’s] recent stock performance.”14 In reality, the board meeting minutes brought to light by the Plaintiff made it clear that the Company had already been subject to significant shareholder pressure. The Court found that “[g]iven the Company chose to speak on the topic, stockholders were entitled to know the depth and breadth of pressure confronting the Company, especially given that it already existed.”15
Following the Court’s reversal of the Court of Chancery’s decision and, with the benefit of additional discovery, the Plaintiff filed an Amended Complaint on March 14, 2019 (the “Amended Complaint”). The Amended Complaint names Apollo, the Company’s counsel, Cravath, Swaine & Moore LLP (“Cravath”), and the Company’s financial advisor, JPMorgan Chase & Co. (“JPMorgan”), as additional defendants, claiming that each aided and abetted the Company’s directors in violating their fiduciary duties. While a significant portion of new information in the Amended Complaint is redacted, Plaintiff appears to have obtained additional communications between the various parties, including Apollo, Cravath and JPMorgan, leading Plaintiff to allege that the additional parties aided and abetted the directors, calling the process led by the Strategic Transaction Committee “a choreographed, sham strategic review and sales process” and claiming that “Cravath’s task was to lend a patina of integrity to a sham auction.” While a spokesperson for the Company has stated that the claims against Cravath and JPMorgan are without merit and there is no related precedent from a Delaware court, it is obvious that legal and financial advisors can put themselves at risk of liability if they elect to craft public disclosure documents that do not reflect the complete reality of a deal process.
In the Morrison decision, the Court held that a transaction will not qualify for review under the business judgment rule, and the Corwin doctrine will not apply, where stockholders are not fully informed due to incomplete or inaccurate disclosures. It is crucial that complete and accurate board meeting minutes are kept and essential that those minutes are used to prepare complete and accurate public disclosure documents. It is now clear that board materials and emails produced in connection with a Section 220 demand will be closely scrutinized and compared to any public disclosures made in connection with a transaction. If the public disclosures do not mirror the material aspects of documents that are discoverable pursuant to Section 220, all parties to the transaction face the risk of liability after additional discovery following the rejection of a motion to dismiss based on the application (or lack thereof) of the Corwin doctrine.