United States: Delaware Supreme Court Cautions That "Partial And Elliptical Disclosures" Cannot Support The Application Of Corwin Business Judgment Review

On July 9, 2018, the Delaware Supreme Court held in Morrison v. Berry that Corwin business judgment review will not apply to stockholder-approved transactions when "partial and elliptical" disclosures leave stockholders less than fully informed. This decision, which reversed a dismissal by the Court of Chancery, serves as a court-described "cautionary reminder" that disclosures to stockholders must faithfully reflect material facts in order for transaction parties to benefit from the director-friendly standard established by the Delaware Supreme Court in Corwin.

Background

In the underlying transaction, an affiliate of Apollo Global Management, LLC acquired The Fresh Market for $28.50 per share. Apollo had historically expressed interest in acquiring the company, and had engaged in preliminary discussions with the company's founder and Chairman, Ray Berry, concerning a potential transaction. Following Apollo's unsolicited indication of interest, the company's board of directors formed a strategic transaction committee to review and negotiate a potential transaction, and Mr. Berry agreed to recuse himself from all board meetings concerning a potential transaction. The committee ran a competitive auction process that resulted in multiple premium bids. Following the auction, Fresh Market entered into a merger agreement with Apollo providing for a two-step transaction at a price that represented a 53% premium over the company's unaffected stock price and a 21-day post-signing "go-shop" period. Mr. Berry and his son, Brett Berry, agreed to roll their collective 9.8% stake in the company into an approximately 20% stake in the post-closing entity. Holders of a majority of the company's shares held by unaffiliated stockholders tendered their shares in favor of the transaction.

As is customary, the announcement of the transaction led to multi-forum litigation. Certain stockholder plaintiffs asserted claims in federal courts in both Delaware and North Carolina under Section 14 of the Securities Exchange Act of 1934, arguing, among other things, that the Schedule 14D-9 filed by Fresh Market in connection with the transaction was materially misleading, and that the transaction violated the "Best Price" Rule under Rule 14d-10. Those claims were abandoned after Fresh Market made mooting supplemental disclosures. Certain other stockholders filed a breach of fiduciary duty action in North Carolina state court, alleging that the Fresh Market directors breached their duties by failing to take steps to maximize the consideration received by stockholders in the transaction and by agreeing to preclusive deal protection provisions. Other stockholders filed statutory appraisal actions in the Court of Chancery, which eventually settled. The Morrison plaintiffs, whose class action breach of fiduciary duty claim against the company's directors was the subject of this appeal, took a different approach, first pursuing the company's books and records through Section 220 of the Delaware General Corporation Law. To resolve the Section 220 litigation that was filed, the company produced over 2,000 pages of documents, including board meeting minutes and certain board-level communications, including an email from the Berrys' counsel to the company's counsel, to which plaintiffs cited extensively in their complaint.

In their post-closing breach of fiduciary duty action, plaintiffs in Morrison claimed that the Berrys had manipulated the transaction process to favor Apollo, thereby causing the transaction to be consummated at an unfair price, and asserted that the Schedule 14D-9 was materially misleading, particularly with respect to the disclosures concerning the relationship between the Berrys and Apollo. The directors moved to dismiss, arguing that, under Corwin, the approval (via tender) of the transaction by a majority of fully informed and uncoerced stockholders required dismissal. Vice Chancellor Glasscock agreed, finding that none of the omitted or allegedly misleading information would have been material to stockholders because it would not have made stockholders less likely to tender their shares. The plaintiffs appealed.

Delaware Supreme Court Decision

On appeal, relying primarily on the board minutes and the email from the Berrys' counsel to company counsel obtained in the Section 220 proceeding, the plaintiffs argued that the Schedule 14D-9 was materially incomplete or misleading in four primary respects:

  • It allegedly omitted information regarding whether Ray Berry had misled the board regarding the existence of a side agreement with Apollo;
  • It allegedly omitted information about Ray Berry's preference for a rollover transaction with Apollo and willingness (or lack thereof) to roll equity in a potential transaction with any other buyer;
  • It allegedly omitted information about Ray Berry's statement to the board that he would consider selling his shares if the company remained public; and
  • It allegedly misrepresented one of the board's reasons for forming a strategic transaction committee to evaluate a potential transaction, indicating that the committee was formed in part to avoid potential activist stockholder pressure when in fact the board was already facing activist pressure.

The Court of Chancery had held that those alleged omissions and partial disclosures were immaterial because they "would not have made investors less likely to tender" their shares. Reversing the Court of Chancery, in an opinion by Justice Valihura that was joined by Justices Strine and Vaughn, the Supreme Court rejected the materiality standard applied by the Court of Chancery, concluding that 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," which is the customary materiality standard articulated in TSC v. Northway and typically applied by Delaware courts. The Supreme Court also highlighted the duty to avoid misleading partial disclosures.

The Supreme Court then analyzed each of the alleged omissions or misleading statements, comparing, side by side in tabular form, the relevant language from the Schedule 14D-9 with the documents produced in response to the plaintiffs' books and records demand. The Court concluded that those documents showed "troubling facts regarding director behavior" that were not disclosed in the Schedule 14D-9, and that those facts were 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 [the] sale process." In particular, the Court was troubled by the allegation that Ray Berry, according to his counsel's email, appeared to have agreed to partner with Apollo early in the process but denied the existence of such an agreement when questioned by the board. As a result, the Court concluded that the company's stockholders were not fully informed when they approved the transaction, and that the Corwin business judgment standard of review did not apply.

Implications

The Corwin decision has provided defendants with a powerful motion to dismiss argument since it was issued in October 2015. Indeed, Morrison is only the second case in which the Supreme Court has reversed a dismissal based on the application of Corwin business judgment review, with the first being the Court's decision from earlier this year in Appel v. Berkman.1 The Court in Morrison emphasized "careful" application of Corwin given its potentially case-dispositive impact, and closely scrutinized the company's contemporaneous documents to see if they supported the facts disclosed in the Schedule 14D-9. Given the discrepancies it found between those documents and the public disclosures, the Court cautioned "directors and the attorneys who advise them" to avoid "partial and elliptical disclosures." This warning underscores the self-evident importance of properly reflecting the underlying factual record in disclosures to stockholders. In addition, the Court also noted certain inconsistencies between the "background of the merger/offer" section in the Schedule 14D-9 issued by the company and in Apollo's Schedule TO, which highlights the need to synchronize target and buyer disclosures, where possible.

More broadly, the decision in Morrison illustrates the rising use of Section 220 books and records demands by stockholder plaintiffs in the M&A context. Such demands are being used as a substitute for the pre-closing discovery that plaintiffs previously sought to obtain in connection with expedited proceedings, and, as illustrated in Morrison, can be used to attempt to avoid dismissal if the documents produced reveal discrepancies between the factual record and the relevant disclosures. Of course, the Morrison decision also shows that, despite the "sky is falling" claims from some in the stockholder plaintiffs' bar, well-pled, fact-based claims can still survive a motion to dismiss based on Corwin under appropriate circumstances.

Footnote

1. 180 A.3d 1055 (Del. 2018).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions