Morrison v. Berry - 191 A.3d 268 (Del. 2018)

Rule:

Under the Corwin doctrine, the business judgment rule is invoked as the appropriate standard of review for a post-closing damages action when a merger that is not subject to the entire fairness standard of review has been approved by a fully informed, uncoerced majority of the disinterested stockholders. The Corwin doctrine is premised on the view that, when the real parties in interest—the disinterested equity owners—can easily protect themselves at the ballot box by simply voting no, the utility of a litigation-intrusive standard of review promises more costs to stockholders in the form of litigation rents and inhibitions on risk-taking than it promises in terms of benefits to them. The same is true of stockholders deciding whether to tender their shares, and the Corwin doctrine has been extended to these circumstances. However, those same stockholders cannot possibly protect themselves when left to vote on an existential question in the life of a corporation based on materially incomplete or misleading information. Careful application of Corwin is important due to its potentially case-dispositive impact.

Facts:

In March 2016, soon after The Fresh Market (the "Company") announced plans to go private, the Company publicly filed certain required disclosures under the federal securities laws. Given that the transaction involved a tender offer, the required disclosures included a Solicitation/Recommendation Statement on Schedule 14D-9 (together with amendments, the "14D-9"), which articulated the Board's reasons for recommending that stockholders accept the tender offer—from an entity controlled by private equity firm Apollo Global Management LLC ("Apollo") for $28.5 in cash per share. The 14D-9 also included a narrative of the events leading up to the transaction, which, in addition to the tender offer, included an equity rollover whereby The Fresh Market's founder, Ray Berry, and his son, Brett—who collectively owned 9.8% of the Company's shares—were to roll over their equity and end up with an approximately 20% stake in the Company upon the closing. As also required under the federal securities laws, Apollo publicly filed a Schedule TO, which included its own narrative of the background to the transaction. The 14D-9 incorporated Apollo's Schedule TO by reference. Stockholder Elizabeth Morrison suspected that the Company's directors had breached their fiduciary duties in the course of the sale process, and she sought Company books and records pursuant to Section 220 of the Delaware General Corporation Law. The Company denied her request, and the tender offer closed as scheduled on April 21 with 68.2% of outstanding shares validly tendered.  Litigation over the Section 220 demand ensued, and Morrison obtained several key documents, such as board minutes and a crucial e-mail from Ray Berry's counsel to the Company's lawyers. Morrison then filed this action in the Court of Chancery. It included a breach of fiduciary duty claim against all ten of the Company's directors, including Ray Berry, and a claim for aiding and abetting the breach against Ray Berry's son, Brett Berry, who did not serve on the Board. The thrust of Morrison’s breach of fiduciary duty claim was that Ray and Brett Berry teamed up with Apollo to buy The Fresh Market at a discount by deceiving the Board and inducing the directors to put the Company up for sale through a process that "allowed the Berrys and Apollo to maintain an improper bidding advantage" and "predictably emerge as the sole bidder for Fresh Market" at a price below fair value. Morrison alleged that the Board and the stockholders were misled into believing that Ray Berry would open-mindedly consider partnering with any private equity firm willing to outbid Apollo, but, instead, "the reality of the situation was that Ray Berry (a) had already formed the belief that Apollo was uniquely well situated to buy Fresh Market; (b) had already entered into an undisclosed agreement with Apollo; and (c) was incentivized not to create price competition for Apollo." In moving to dismiss, Defendants argued that Corwin applied. Under that doctrine, the "business judgment rule is invoked as the appropriate standard of review for a post-closing damages action when a merger that is not subject to the entire fairness standard of review has been approved by a fully informed, uncoerced majority of the disinterested stockholders." The Corwin doctrine is premised on the view that, "when the real parties in interest—the disinterested equity owners—can easily protect themselves at the ballot box by simply voting no, the utility of a litigation-intrusive standard of review promises more costs to stockholders in the form of litigation rents and inhibitions on risk-taking than it promises in terms of benefits to them." The same is true of stockholders deciding whether to tender their shares, and the Corwin doctrine has been extended to these circumstances. However, those same stockholders cannot possibly protect themselves when left to vote on an existential question in the life of a corporation based on materially incomplete or misleading information. Careful application of Corwin is important due to its potentially case-dispositive impact. In granting Defendants' motion to dismiss this case, the Court of Chancery stated that this matter "presents an exemplary case of the utility of the ratification doctrine, as set forth in Corwin and Volcano."

Issue:

Did the Court of Chancery err in applying Corwin because an array of alleged deficiencies rendered the 14D-9's disclosures materially incomplete and misleading?

Answer:

Yes

Conclusion:

The court found that Morrison sufficiently pleaded, inter alia, a breach of fiduciary duty claim against the company's directors in connection with a plan for the company to go private because the complaint alleged that the directors failed to show, as required under Corwin, that the vote was fully informed due to the disclosures containing material omissions concerning an "agreement" with the company's founder and the private equity firm that bought the company and the founder's "threat" to sell his shares, and the disclosures were materially misleading about the founder's clear preference for the firm and the Board's reasons for forming the Strategic Transaction Committee.