Morrison v. Berry
191 A.3d 268 (2018)
Rule of Law:
The business judgment rule's protection under the Corwin doctrine does not apply to a post-closing damages action when a merger has been approved by a stockholder vote that was not fully informed due to materially incomplete or misleading disclosures, particularly when those disclosures contain troubling omissions or misleading characterizations of director behavior and the sale process.
Facts:
- On October 1, 2015, The Fresh Market received an unsolicited preliminary non-binding indication of interest from Apollo Global Management LLC to purchase the Company for $30 per share in cash, with Apollo stating it had discussed an equity rollover and an "exclusive partnership" with Ray Berry.
- On October 15, 2015, The Fresh Market's Board of Directors convened to review Apollo's proposal, formed a Strategic Transaction Committee, and directly asked Ray Berry if he had an agreement with Apollo, which Ray Berry denied before recusing himself.
- On November 25, 2015, Apollo reaffirmed its proposal and again stated it was making the proposal "together with Ray Berry and Brett Berry."
- On November 28, 2015, Ray Berry's counsel sent an email to the Company's lawyers, stating that Ray Berry had agreed in October to roll over his equity if Apollo purchased the Company, expressed his belief that the Company needed to go private, and indicated he would sell his shares if it remained public.
- The Company filed a Solicitation/Recommendation Statement on Schedule 14D-9 (14D-9) articulating the Board’s reasons for recommending stockholders accept Apollo’s tender offer, which included an equity rollover for Ray and Brett Berry.
- Prior to the Board meeting on October 15, 2015, activist investor Neuberger Berman LLC sent a letter on October 8, 2015, to the Board, detailing grievances with the Company's performance and urging a comprehensive strategic review, including a potential sale, which the Board discussed.
Procedural Posture:
- Stockholder Elizabeth Morrison suspected directors of The Fresh Market breached their fiduciary duties and sought company books and records pursuant to Section 220 of the Delaware General Corporation Law.
- The Company denied Morrison's Section 220 request.
- Litigation ensued over the Section 220 demand, through which Morrison obtained several key documents, including board minutes and a critical email.
- Morrison filed an action in the Court of Chancery of the State of Delaware, alleging a breach of fiduciary duty claim against ten of the Company’s directors (Ray Berry, Richard A. Anicetti, Michael D. Casey, Jeffrey Naylor, Richard Noll, Bob Sasser, Robert K. Shearer, Michael Tucci, Steven Tanger, and Jane Thompson) and an aiding and abetting claim against Brett Berry (who was not a director).
- Defendants moved to dismiss the complaint, arguing that the Corwin doctrine applied because the merger had been approved by a fully informed, uncoerced majority of disinterested stockholders.
- The Court of Chancery granted Defendants' motion to dismiss, finding that the Corwin doctrine applied.
- Morrison (Appellant) appealed the Court of Chancery's decision to the Supreme Court of the State of Delaware, with Ray Berry and other defendants (Appellees).
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Issue:
Does the Corwin doctrine, which typically invokes the business judgment rule for post-closing damages actions after an uncoerced, fully informed majority stockholder vote, apply when the disclosures provided to stockholders are materially incomplete or misleading regarding the motivations and commitments of key fiduciaries and the integrity of the sale process?
Opinions:
Majority - Valihura, Justice
No, the business judgment rule is not invoked under the Corwin doctrine because the defendants failed to demonstrate that the stockholder vote was fully informed. The Company's disclosures in the 14D-9 were materially incomplete and misleading, preventing stockholders from making an informed decision. The Court found several deficiencies: 1. Agreement Omission: The 14D-9 omitted the crucial detail from the November 28 E-mail that Ray Berry had an existing agreement with Apollo since October to roll over his equity. This contradicted his direct denial to the Board on October 15 and was a material fact showing Ray Berry was not forthcoming with the Board. A reasonable stockholder would find this information important to assess director behavior and the deal's integrity. 2. Misleading Preference for Apollo: The 14D-9 misleadingly implied Ray Berry's openness to other bidders while omitting his statements to the Board and in the November 28 E-mail suggesting a clear preference for Apollo for an equity rollover and a belief that Apollo was "uniquely qualified." This partial disclosure presented a sanitized and distorted narrative, denying stockholders a balanced view of events. 3. Omission of Ray Berry's Intent to Sell: The 14D-9 failed to disclose Ray Berry's communication via his counsel that he believed a sale was in the Company's best interest "at this time" and that he would seriously consider selling his shares if the Company remained public. This was an economically relevant statement of intent that a reasonable stockholder would want to know. 4. Misrepresentation of Committee Formation Reasons: The 14D-9 stated the Board formed the Strategic Transaction Committee because the Company "could become the subject of shareholder pressure." This was materially misleading because the Board minutes revealed that the Company had already become subject to "significant amount of shareholder outreach," including a specific letter from activist investor Neuberger Berman. Once the Company chose to speak on the topic, it was obligated to provide a full and fair characterization. These material omissions and misleading statements collectively prevented the stockholder vote from being fully informed, thus precluding the application of the Corwin doctrine and the business judgment rule protection. The Court emphasized that defendants bear the burden of proving the vote was fully informed.
Analysis:
This case significantly reinforces the high bar for satisfying the 'fully informed' requirement of the Corwin doctrine in Delaware corporate law. It serves as a cautionary tale for boards and their legal counsel, emphasizing that even partial disclosures trigger a duty for full and fair characterization of events, particularly concerning director conduct and the integrity of the sale process. Future cases will likely scrutinize disclosure documents more rigorously for subtle omissions or misleading narratives, especially when key fiduciaries have undisclosed conflicts or strong preferences. The ruling highlights that the `Corwin` doctrine is not a shield for inadequate disclosures, ensuring that the foundational principle of stockholder ratification relies on genuine transparency.
