On July 9, 2018, the Delaware Supreme Court reversed and remanded a decision by the Delaware Court of Chancery to dismiss stockholder class claims for breach of fiduciary duty brought against the former directors of The Fresh Market (TFM) after its acquisition in a two-step take-private merger by affiliates of Apollo Global Management, LLC (“Apollo”). Morrison v. Berry, No. 445, 2017 (Del. July 9, 2018). As discussed in our prior post on this case, the Court of Chancery dismissed claims that the sale process undertaken by TFM was a “sham” designed by TFM’s founder to deliver the company into the hands of a favored suitor. Specifically, the Court of Chancery concluded that the facts regarding the involvement of TFM’s founder with Apollo were adequately disclosed in connection with the tender offer—in which 68.2% of shares were tendered—and the deal was therefore subject to the deferential business judgment rule under Corwin v. KKR Financial Holdings LLC, 125 A.3d 304 (Del. 2015). Finding that the complaint adequately alleged several “materially incomplete and misleading” disclosures, the Delaware Supreme Court reversed.

Under the Corwin doctrine, the business judgment rule generally applies to post-closing breach of fiduciary duty claims when a merger “has been approved by a fully informed, uncoerced majority of the disinterested stockholders.” The Delaware Chancery Court found that the disclosures in connection with the tender offer were adequate and that any omissions were immaterial. The Delaware Supreme Court disagreed.

Specifically, the Delaware Supreme Court highlighted a number of alleged deficiencies in the disclosures, including omissions regarding: (i) an “agreement” between TFM’s founder and Apollo about which he was allegedly not forthcoming with the board; (ii) the founder’s “clear preference” for Apollo as a suitor; (iii) the founder’s indication that he would sell his shares if the company did not pursue a sale; and (iv) shareholder pressure regarding TFM’s strategic direction. Regarding these, the Court found that plaintiff had “unearthed and pled in her complaint specific, material, and undisclosed facts”—including “troubling facts regarding director behavior”—which would have “shed light on the depth of [the founder’s] commitment to Apollo, the extent of … pressure on the Board, and the degree that this influence may have impacted the structure of [the] sale process.”

Notably, the Court of Chancery explained its findings of immateriality by noting that corrected disclosures “would not have made investors less likely to tender.” But the Delaware Supreme Court rejected that formulation, declaring “[t]hat is not the test.” Instead, the Court elaborated on materiality:

This is any information that an investor would consider important. Such information could make a stockholder less likely to tender. But it also may be material if it is the sort of information that would make a stockholder more likely to tender, or just information that a reasonable stockholder would generally want to know in making the decision, regardless of whether it actually sways a stockholder one way or the other, as a single piece of information rarely drives a stockholder’s vote.

The Court added that this decision should serve as a “cautionary reminder” that “‘partial and elliptical disclosures’ cannot facilitate the protection of the business judgment rule under the Corwin doctrine.”

Morrison v Berry