Morrison v. Berry ( 2018 )

IN THE SUPREME COURT OF THE STATE OF DELAWARE
ELIZABETH MORRISON, Individually §
And on Behalf of All Others Similarly
§
Situated, § No. 445, 2017
Appellant, §
Plaintiff Below,
§ Case Below:
§
v. § Court of Chancery
§ of the State of Delaware
RAY BERRY, RICHARD A. ANICETTI, §
MICHAEL D. CASEY, JEFFREY NAYLOR, § C.A. No. 12808-VCG
RICHARD NOLL, BOB SASSER, ROBERT §
K. SHEARER, MICHAEL TUCCI, STEVEN §
TANGER, JANE THOMPSON, and BRETT §
BERRY, §
Appellees, §
Defendants Below. §
Submitted: April 18, 2018
Decided: July 9, 2018
Revised: July 27, 2018
Before STRINE, Chief Justice; VALIHURA and VAUGHN, Justices.
Upon appeal from the Court of Chancery. REVERSED and REMANDED.
Joel Friedlander, Esquire (argued), Jeffrey M. Gorris, Esquire, and Christopher P. Quinn,
Esquire, of Friedlander & Gorris, P.A., Wilmington, Delaware. Of Counsel: Randall J.
Baron, Esquire, of Robbins Geller Rudman & Dowd LLP, San Diego, California;
Christopher H. Lyons, Esquire, of Robbins Geller Rudman & Dowd LLP, Nashville,
Tennessee for Appellant.
Rudolf Koch, Esquire (argued), Matthew D. Perri, Esquire, and Ryan P. Durkin, Esquire
of Richards, Layton & Finger, P.A., Wilmington, Delaware. Of Counsel: Adam L.
Sisitsky, Esquire, Lavinia M. Weizel, Esquire, of Mintz, Levin, Cohn, Ferris, Glovsky and
Popeo, P.C., Boston, Massachusetts; Robert I. Bodian, Esquire, and Scott A. Rader,
Esquire, of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C., New York, New York
for Appellees Richard A. Anicetti, Michael D. Casey, Jeffrey Naylor, Richard Noll, Bob
Sasser, Robert K. Shearer, Michael Tucci, Steven Tanger, and Jane Thompson.
John L. Reed, Esquire, Ethan H. Townsend, Esquire, and Harrison S. Carpenter, Esquire,
of DLA Piper LLP, Wilmington, Delaware. Of Counsel: David Clarke, Jr., Esquire of
DLA Piper LLP, Washington, D.C. for Appellees Ray Berry and Brett Berry.
VALIHURA, Justice:
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”1 cannot facilitate the
protection of the business judgment rule under the Corwin doctrine.2
***
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.3 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
1
Arnold v. Soc’y for Sav. Bancorp, Inc., 650 A.2d 1270, 1280 (Del. 1994).
2
See Corwin v. KKR Fin. Holdings LLC, 125 A.3d 304, 312 (Del. 2015); Appel v. Berkman, 180
A.3d 1055, 1064 (Del. 2018).
3
See 15 U.S.C. § 78n(d)(4) (requiring compliance with the terms prescribed by the SEC whenever
recommending that stockholders tender their shares); 17 C.F.R. § 240.14d-9 (outlining the SEC’s
requirements for the 14D-9); 17 C.F.R. § 240.14d-101 (Schedule 14D-9); see also 3 Thomas Lee
Hazen, Treatise on the Law of Securities Regulation § 11:16, Westlaw (updated May 2018)
(“Schedule 14D-9 is the disclosure document that must be filed in connection with any other
solicitation or recommendation for or against tender offers.”). State law complements the
directors’ duties of disclosure under the federal securities laws. See Arnold, 650 A.2d at 1277(noting that the Delaware state-law “‘fiduciary duty to disclose fully and fairly all material
information within the board’s control when it seeks shareholder action’” is an “obligation [that]
attaches to proxy statements and any other disclosures in contemplation of stockholder action.”
(quoting Stroud v. Grace, 606 A.2d 75, 84 (Del. 1992))).
2
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.4 The 14D-9 also
included a narrative of the events leading up to the transaction,5 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.6 As also required under the federal securities laws,7 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.8
4
As used in this opinion, “Apollo” also refers to Apollo Management VIII, L.P., the entity
involved in this deal, or equity funds managed by that entity.
5
See Matador Capital Mgmt. Corp. v. BRC Holdings, Inc., 729 A.2d 280, 295 (Del. Ch. 1998)
(“Delaware law requires directors who disclose such a recommendation also disclose such
information about the background of the transaction, the process followed by them to maximize
value in the sale, and their reason for approving the transaction so as to be materially accurate and
complete.”).
6
See The Fresh Market, Inc., Schedule 14D-9 Solicitation/Recommendation Statement Under
Section 14(d)(4) of the Securities Exchange Act of 1934 (March. 25, 2016), at 1 (A59), 4 (A62)
[hereinafter 14D-9]; Plaintiff’s Opening Br. at 28-29 n.5 (calculating the Berrys’ post-merger
equity stake of 20% based on publicly disclosed information). The Berrys’ pre-merger equity
stake accounted for 9.8% of the 47,049,217 total shares outstanding. Plaintiff’s Opening Br. at
28-29 n.5 (citing 14D-9, at 1 (A59)). Given the transaction price of $28.50 per share, the Berrys’
stake was valued at $131.4 million, or approximately 20.0% of the transaction’s total equity
financing of $656 million. Id. (citing 14D-9, at 4 (A62)).
7
See 15 U.S.C. § 78n(d)(4) (requiring compliance with the terms prescribed by the SEC whenever
soliciting stockholders’ shares through a tender offer); 17 C.F.R. § 240.14d-3 (requiring that the
Tender Offer Statement on Schedule TO be filed with the SEC and delivered to stockholders); 17
C.F.R. § 240.14d-100 (Schedule TO).
8
See 14D-9, supra note 6, at 59 (A117).
2
After reading these disclosures, as the tender offer was still pending, stockholder
Elizabeth Morrison (“Plaintiff”) 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.9
Litigation over the Section 220 demand ensued, and Plaintiff obtained several key
documents, such as board minutes and a crucial e-mail from Ray Berry’s counsel to the
Company’s lawyers. Plaintiff then filed this action in the Court of Chancery. It includes
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.10
The thrust of Plaintiff’s breach of fiduciary duty claim is 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.11 Plaintiff also alleges that
9
The Fresh Market, Inc., Form 8-K (Apr. 27, 2016), at B112.
10
The director defendants, other than Ray Berry, filed a separate brief and defined themselves as
the “Director Defendants.” We use “Director Defendants” herein when quoting from their brief.
We use “Defendants” to refer to all eleven defendants. Ray and Brett Berry are separately
represented and filed their own brief.
11
Verified Complaint, Morrison v. Berry, C.A. No. 12808-VCG, ¶ 2 (A137) [hereinafter
Complaint].
3
Ray Berry’s commitment to Apollo was not fully disclosed to the Board or to other
stockholders, and that the auction that ensued led to a pre-ordained result: Apollo was the
winner, with the Berrys participating in an equity rollover. In other words, Plaintiff alleges
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, “[t]he 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.”12
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.”13 The Corwin doctrine is premised on the view that, “[w]hen 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.”14 The same is true of stockholders deciding
12
Id. ¶ 16 (A142).
13
Corwin, 125 A.3d at 305-06 (Del. 2015).
14
Id. at 313; In re Lear Corp. S’holder Litig., 926 A.2d 94, 114-15 (Del. Ch. 2007) (“Delaware
corporation law gives great weight to informed decisions made by an uncoerced electorate. When
4
whether to tender their shares, and the Corwin doctrine has been extended to these
circumstances.15 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.16
In granting Defendants’ motion to dismiss this case, the Court of Chancery stated
that this matter “presents an exemplary case of the utility of th[e] ratification doctrine, as
set forth in Corwin and Volcano.”17 Respectfully, we disagree.
Here, Defendants have not shown, as required under Corwin, that the vote was
fully informed—especially given that Plaintiff’s complaint alleges facts showing that the
disinterested stockholders make a mature decision about their economic self-interest, judicial
second-guessing is almost completely circumscribed by the doctrine of ratification.”).
15
In re Volcano Corp. S’holder Litig., 143 A.3d 727, 743-44, 747 (Del. Ch. 2016) (applying
Corwin to “acceptance of a first-step tender offer by fully informed, disinterested, uncoerced
stockholders representing a majority of a corporation’s outstanding shares in a two-step merger”
under 8 Del. C. § 251(h) because “[a] stockholder is no less exercising her ‘free and informed
chance to decide on the economic merits of a transaction’ simply by virtue of accepting a tender
offer rather than casting a vote. And, judges are just as ‘poorly positioned to evaluate the wisdom
of’ stockholder-approved mergers under Section 251(h) as they are in the context of corporate
transactions with statutorily required stockholder votes.” (quoting Corwin, 125 A.3d at 312-13)),
aff’d, 156 A.3d 697, 2017 WL 563187 (Del. 2017) (TABLE); Larkin v. Shah, 2016 WL 4485447,
at *20 (Del. Ch. Aug. 25, 2016) (applying Corwin to completed first-step tender offer); see also
Berkman, 180 A.3d at 1057-58 (reversing the Court of Chancery’s dismissal under Corwin
because, contrary to the Court of Chancery’s holding, the tender offer was not fully informed).
16
See Singh v. Attenborough, 137 A.3d 151, 152 (Del. 2016) (Order) (“When the business
judgment rule standard of review is invoked because of a vote, dismissal is typically the result.
That is because the vestigial waste exception has long had little real-world relevance, because it
has been understood that stockholders would be unlikely to approve a transaction that is
wasteful.”).
17
Morrison v. Berry (Chancery Op.), 2017 WL 4317252, at *1 (Del. Ch. Sept. 28, 2017)
(referencing Corwin, 125 A.3d at 305-06; Volcano, 143 A.3d at 743-44, 747).
5
Company failed to disclose “troubling facts regarding director behavior . . . that would have
been material to a voting stockholder.”18 A reasonable stockholder would have found these
facts 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 sale process. Thus, “the business
judgment rule is not invoked.”19
We REVERSE the Court of Chancery’s decision for these reasons and those that
follow, and we REMAND this case for further proceedings consistent with this opinion.
I.
Plaintiff’s argument on appeal is straightforward: she contends that the Court of
Chancery erred in applying Corwin because an array of alleged deficiencies rendered the
14D-9’s disclosures materially incomplete and misleading.20 A brief overview of the key
18
Corwin, 125 A.3d at 312; Harbor Fin. Partners v. Huizenga, 751 A.2d 879, 898-99 (Del. Ch.
1999) (“If the corporate board failed to provide the voters with material information undermining
the integrity or financial fairness of the transaction subject to the vote, no ratification effect will
be accorded to the vote and the plaintiffs may press all of their claims. . . . In this regard, it is
noteworthy that Delaware law does not make it easy for a board of directors to obtain ‘ratification
effect’ from a stockholder vote.”).
19
Corwin, 125 A.3d at 312.
20
In recounting the facts of this case, “we (1) accept all well pleaded factual allegations as true,
(2) accept even vague allegations as ‘well pleaded’ if they give the opposing party notice of the
claim, (3) draw all reasonable inferences in favor of the non-moving party, and (4) do not affirm a
dismissal unless the plaintiff would not be entitled to recover under any reasonably conceivable
set of circumstances.” Cent. Mortg. Co. v. Morgan Stanley Mortg. Capital Holdings LLC, 27 A.3d
531, 535 (Del. 2011) (citing Savor, Inc. v. FMR Corp., 812 A.2d 894, 896-97 (Del. 2002)). Our
review is de novo. Id. Further “[w]hen a plaintiff expressly refers to and heavily relies upon
documents in her complaint, these documents are considered to be incorporated by reference into
the complaint; this is true even where the documents are not expressly incorporated into or attached
to the complaint.” Freedman v. Adams, 2012 WL 1345638, at *5 (Del. Ch. Mar. 30, 2012) (citing
Albert v. Alex. Brown Mgmt. Servs., Inc., 2005 WL 1594085, at *12 (Del. Ch. June 29, 2005); e4e,
6
dates recounted in the 14D-9 is helpful to establish the context of the alleged flaws in the
disclosures.
On October 1, 2015, The Fresh Market received an “unsolicited preliminary non-
binding indication of interest” from Apollo to purchase the Company for $30 per share in
cash.21 The letter stated that Apollo had discussed an equity rollover with the Berrys and
had an “exclusive partnership” with them.22 On October 15, the Company’s Board
convened a meeting to review the proposal and plan its course of action. The directors
authorized the formation of a Strategic Transaction Committee (the “Committee”), and
they specifically asked Ray Berry if he had an agreement with Apollo. Ray Berry denied
that he did, and he recused himself from the meeting “so that the members of the Board
Inc. v. Sircar, 2003 WL 22455847, at *3 (Del. Ch. Oct. 9, 2003)), aff’d, 58 A.3d 414 (Del. 2013).
Here, the Complaint expressly refers to and relies heavily upon the two key disclosure
documents—the 14D-9 and Schedule TO—as well as the Board meeting minutes and other internal
documents obtained via the Section 220 Litigation. See Winshall v. Viacom Int’l, Inc., 76 A.3d
808, 818 (Del. 2013), as corrected (Oct. 8, 2013) (“[A] plaintiff may not reference certain
documents outside the complaint and at the same time prevent the court from considering those
documents’ actual terms.” (quoting Fletcher Int’l, Ltd. v. ION Geophysical Corp., 2011 WL
1167088, at *3 n. 17 (Del. Ch. Mar. 29, 2011))); In re Books-A-Million, Inc. S’holders Litig., 2016
WL 5874974, at *1 (Del. Ch. Oct. 10, 2016) (“This court may consider the Proxy Statement to
establish what was disclosed to stockholders and other facts that are not subject to reasonable
dispute.” (citing In re Gen. Motors (Hughes) S’holder Litig., 897 A.2d 162, 170 (Del. 2006);
Abbey v. E.W. Scripps Co., 1995 WL 478957, at *1 n.1 (Del. Ch. Aug. 9, 1995))), aff’d, 164 A.3d
56 (Del. 2017); Amalgamated Bank v. Yahoo! Inc., 132 A.3d 752, 797 (Del. Ch. 2016) (“The
incorporation-by-reference doctrine permits a court to review the actual document to ensure that
the plaintiff has not misrepresented its contents and that any inference the plaintiff seeks to have
drawn is a reasonable one.”).
21
14D-9, supra note 6, at 17 (A75).
22
Complaint, supra note 11, ¶ 44 (A150) (quoting Apollo letter to Board).
7
could engage in a discussion without him present.”23 Following that meeting, Ray Berry
recused himself from Board meetings through the date the Company entered into the
merger agreement.24
In a letter dated as of that date, October 15, 2015, Apollo stated that its proposal
would expire on October 20, and, on October 21, the firm formally withdrew it. But, on
November 25, Apollo reaffirmed the same proposal and again stated that it “was making
the proposal together with Ray Berry and Brett Berry.”25 The Company’s lawyers wrote
Ray Berry’s counsel seeking clarity on Ray Berry’s status with Apollo. Ray Berry’s
counsel responded by e-mail on November 28 (the “November 28 E-mail”).26 That e-mail
referred to an agreement that Ray Berry had with Apollo in October—an agreement that
can rationally be seen as contrary to Ray Berry’s representation to the Board on October
15 that he had no such agreement. The sale process officially began on December 3, the
day after the conclusion of a two-day Board meeting.27
Plaintiff identifies a number of problems that allegedly render the 14D-9 materially
misleading, including the following four:
23
The Fresh Market, Inc., Minutes of the Board of Directors Meeting (Oct. 15, 2015), at A31
[hereinafter Oct. 15, 2015 Minutes]. Before the next Board meeting, Ray Berry also provided a
written waiver of notice of any Board meetings at which directors planned to discuss any inquiry
from a potential acquirer, including Apollo’s proposal. 14D-9, supra note 6, at 18-19 (A76-77).
24
14D-9, supra note 6, at 19 (A77).
25
Id. at 20 (A78).
26
See id.; David Clarke to Damien Zoubek and Mark Gentile, E-mail (Nov. 28, 2015), at A40
[hereinafter Nov. 28 E-mail].
27
14D-9, supra note 6, at 20-21 (A78-79).
8
First, the November 28 E-mail from Ray Berry’s counsel reveals that Berry had an
agreement with Apollo as of October, and that revelation must have suggested to the Board
that Berry had not been forthcoming as he previously had denied the existence of an
agreement. But, because the 14D-9 never disclosed this information, the 14D-9 omitted
material information or was misleading.
Second, Ray Berry’s statements expressing a clear preference for a rollover
transaction involving Apollo—and reluctance to engage in such a transaction if another
buyer were to prevail—were material, and these statements were never disclosed to
stockholders. In fact, the 14D-9 disclosures implied otherwise—i.e., that Ray Berry was
willing to partner with a party other than Apollo.
Third, the 14D-9 never disclosed a “threat” contained in the November 28 E-mail—
that Ray Berry would sell his shares if the Board did not undertake a sale process.
Fourth, Plaintiff also alleges that the Board misrepresented the reasons that the
Board formed the Committee tasked with overseeing a sale process because the 14D-9
failed to state that the directors were motivated by existing activist pressure.
Though Plaintiff challenges the adequacy of other disclosures, such as those
concerning the management projections reviewed by the Board, we need not consider them
here given that the aforementioned deficiencies in the disclosures prove sufficient to deny
Corwin “cleansing.”
9
A. Plaintiff alleges serious misrepresentations—both to the Board, and
to stockholders—about Ray Berry’s “agreement” with Apollo.
The November 28 E-mail indicates that Ray Berry had agreed as early as October
that, if Apollo reached a deal with the Board to purchase the Company, he would roll over
his equity interest. But the 14D-9 never mentioned the October agreement and even
suggested that, to the contrary, none ever existed.28 And the Company’s Board minutes
show that Ray Berry also never disclosed this “agreement” to his fellow directors, even
when he was asked directly about his arrangement with Apollo at the October 15, 2015
Board meeting. Plaintiff alleges that the omission of the November 28 E-mail’s revelation
of an October agreement (the “Agreement Omission”) is material “not only in substance
but also because it shows that Ray Berry was lying to the Board, the Board was on notice
that Ray Berry was lying to them and the Board did nothing to address it.”29
The following chart compares the 14D-9’s summary of the November 28 E-mail
with the actual e-mail. Italicized words indicate portions omitted from the 14D-9.
14D-930 November 28 E-Mail31
Berry’s counsel . . . stated that since Since Apollo withdrew its earlier offer in
[Apollo’s] earlier offer had expired on October, Mr. Berry has had one
October 20, 2015, Mr. Berry had engaged conversation with Apollo. During that
in one conversation with [Apollo], and conversation, he agreed, as he did in
28
See, e.g., id. at 17 (A75) (“Mr. Berry further advised [the Company’s general counsel] that he
had not been involved in [Apollo]’s formulation of its proposal, he had not committed to any
participation in a transaction with [Apollo] (or any other potential buyer) and he was not working
with [Apollo] on an exclusive basis.”).
29
Complaint supra note 11, ¶ 124 (A184).
30
14D-9, supra note 6, at 20 (A78).
31
Nov. 28 E-mail, supra note 26, at A40.
10
during that conversation he had agreed that October, that, in the event Apollo agreed
he would roll his equity interest over into on a transaction with TFM, he would roll
the surviving entity if [Apollo] were to be his equity interest over into the surviving
successful in agreeing to a transaction with entity. Apollo determined the price that
TFM.32 was offered.
Plaintiff alleges that the exclusion of “as he did in October” from the 14D-9 is a
material omission not just on its own, but because it undermines the veracity of other
statements that Berry had made to both the Company’s general counsel and its Board. For
example, the 14D-9 states that, on October 5, 2015, Ray Berry told the Company’s general
counsel that he had told Apollo that he “would consider an equity rollover depending upon
the terms . . . .”33 But the 14D-9 omits reference to any agreement to engage in an equity
rollover as of that time. In fact, the 14D-9 also states that Berry even told the general
counsel that “he had not been involved in [Apollo’s] formulation of its proposal, he had
not committed to any participation in a transaction with [Apollo] (or any other potential
buyer) and he was not working with [Apollo] on an exclusive basis.”34 And, when the
Board convened its telephonic meeting on October 15, Berry “reiterated that he had not
32
In their separate answering brief, the Director Defendants point to this sentence and assert that,
“contrary to Plaintiff’s assertion that the Chancery Court ‘confused how Ray Berry’s October
agreement with Apollo was disclosed to the Board on November 28, but was never disclosed to
the stockholders,’ the Chancery Court correctly recognized that Ray Berry’s pre-November 28
agreement with Apollo was explicitly disclosed.” Director Defendants’ Answering Br. at 32
(quoting Plaintiff’s Opening Br. at 8). This assertion is obviously incorrect as the sentence from
the 14D-9 quoted above does not reveal the existence of an agreement predating the post-October
20, 2015 agreement.
33
14D-9, supra note 6, at 17 (A75) (emphasis added).
34
Id.
11
committed to any transaction with [Apollo] (or any other potential bidder),” as recounted
in the 14D-9.35
Moreover, even if the Schedule TO is also considered to be part of the “total mix”
of information disclosed to stockholders, as the Director Defendants urge, any impression
of an agreement is undermined by the 14D-9’s suggestions to the contrary. The Schedule
TO discloses that Apollo called the Berrys just before the submission of its October 1
proposal “to confirm whether they would participate in such a transaction,”36 and states
that the Berrys “indicated they were interested”—albeit with a caveat that they needed
flexibility and Board approval.37 In contrast, though the 14D-9 references several
conversations that Ray Berry had with Apollo before its submission of the October 1
proposal, it undermines any impression one might get of an agreement by describing
Apollo’s last pre-October 1 call as a “courtesy call” in which Apollo stated that it would
be submitting an offer.38
35
Id. at 17-18 (A75-76).
36
Offer to Purchase for Cash All Outstanding Shares of Common Stock of The Fresh Market, Inc.,
dated Mar. 25, 2016, Exhibit (a)(1)(A) to Schedule TO Tender Offer Statement under Section
14(d)(1) or 13(e)(1) of the Securities Exchange Act of 1934, filed by Pomegranate Merger Sub,
Inc., Pomegranate Holdings, Inc., & Apollo Management VIII, L.P., (Mar. 25, 2016), at 28 (A130)
(emphasis added) [hereinafter Schedule TO].
37
See id. (noting that the Berrys “indicated that they would like to retain the flexibility to
participate in a similar transaction with other potential transaction partners in the event that
Management VIII’s proposal was not well received by The Fresh Market Board.”).
38
See 14D-9, supra note 6, at 17 (A75) (describing the conversation as a “courtesy call in which
[Apollo] informed Mr. Berry that [Apollo] would be sending an offer letter to TFM and in which
Mr. Berry did not communicate any positions that were inconsistent with his prior statements.”).
12
Moreover, the 14D-9 omits any mention of Brett Berry in its description of Apollo’s
pre-October 1 contacts with Ray Berry—allegedly because a reference to these discussions
would bolster the impression of an agreement among Apollo, Ray Berry, and Brett Berry.39
Nor does it disclose that, at the October 15, 2015 Board meeting, Ray Berry told the
directors that he “was not aware of any conversation that may or may not have occurred
with Apollo and Brett Berry.”40 Plaintiff alleges that, given that the Schedule TO suggests
that Ray Berry was in fact aware of such conversations,41 this omission is material because,
if revealed, it would have informed stockholders that the Company’s directors “blinded
themselves to the reality of the joint plan among Apollo, Ray Berry and Brett Berry.” 42
Moreover, even if Ray Berry and the 14D-9’s statement that he “had not been involved in
[Apollo’s] formulation of its proposal”43 were literally true, Plaintiff alleges that it is
39
See Complaint, supra note 11, ¶¶ 18-19 (A142-43) (alleging that the 14D-9 omits facts that, “if
disclosed, would call into question the veracity of the narrative that Ray Berry was open to working
with alternative bidders and would point instead to the reality that Ray Berry, Brett Berry and
Apollo had formulated and acted pursuant to a plan to buy Fresh Market at a vulnerable time at
the lowest possible price . . . .”).
40
Oct. 15, 2015 Minutes, supra note 23, at A31.
41
In contrast to the 14D-9, the Schedule TO indicates that, when Ray Berry spoke with the Apollo
representative, senior partner Andrew Jhawar, on September 4, 2015, Berry “recommended that
Mr. Jhawar contact his son, Brett Berry, to explore various structural alternatives for an equity
rollover transaction.” Schedule TO, supra note 36, at 27 (A129). The Schedule TO adds that,
indeed, “Mr. Jhawar and Brett Berry had several communications regarding potential transaction
structures.” Id. Given that Ray Berry had recommended that Jhawar contact Brett, Plaintiff alleges
that it is reasonable to infer that Ray Berry knew such conversations occurred before Apollo
submitted its proposal. See Complaint, supra note 11, ¶ 43 (A150).
42
Complaint, supra note 11, ¶ 48 (A152) (arguing that “[t]he most logical reason the Company
omitted this information is that the Board failed to inquire further and learn that Ray Berry had
instructed Apollo to speak directly to Brett Berry”).
43
14D-9, supra note 6, at 17 (A75).
13
misleading because it omits that he was involved by providing indications of his interest
and directing the Apollo senior partner, Andrew Jhawar, to contact Brett Berry to explore
“various structural alternatives for an equity rollover transaction,” and Jhawar and Brett
Berry then “had several communications regarding potential transaction structures.”44
B. Plaintiff alleges that the 14D-9 misled stockholders
about Ray Berry’s clear preference for Apollo.
Plaintiff alleges that the 14D-9 misleadingly conveys an impression that Berry
would open-mindedly consider offers from a potential purchaser other than Apollo. The
narrative in the 14D-9 fails to mention that Ray Berry divulged to the Board his clear
preference for Apollo and reluctance to consider bids from other prospective purchasers.
For example, the 14D-9 states that, at the October 15 Board meeting, Berry told the
directors that “he had communicated to [Apollo] that he would only participate in a
transaction that was supported by the Board and that he would also be willing to sell his
shares to any potential purchaser for cash in a Board-supported transaction.”45 But the
14D-9 never mentions that, in response to a question from the Company’s outside counsel,
Cravath, Swaine & Moore LLP, as to whether “he would be willing to participate in an
equity rollover with another party were the Corporation to engage in [a] sale transaction
with a party other than Apollo,” Ray Berry also told the Board that “he was not aware of
any other potential private equity buyer that had experience in the food retail industry with
44
See Schedule TO, supra note 36, at 27-28 (A129-30).
45
14D-9, supra note 6, at 18 (A76).
14
whom he would be comfortable engaging in an equity rollover.”46 A fair implication of
this statement in the minutes is that, while Ray Berry would be willing to consider selling
his shares to another private equity buyer for cash, he would not engage in an equity
rollover with a party other than Apollo. But the 14D-9 never discloses that fact.
The November 28 E-mail further suggests Ray Berry’s resistance to participate in
an equity rollover with a non-Apollo party, but the 14D-9’s account never mentions that
resistance in its summary. Again, a comparison between the disclosure of the November
28 E-mail and the November 28 E-mail itself is illustrative. (Italicized words indicate
substantive information omitted.)
14D-947 November 28 E-Mail48
Mr. Berry’s counsel also said that in the Should Apollo not be successful in its bid,
event that another buyer, and not equity Mr. Berry would consider rolling his equity
funds managed by [Apollo], were to interest over in connection with an
acquire TFM, Mr. Berry would also acquisition of TFM by another buy-out
consider rolling his equity interest over in firm that successfully bids for the
such a transaction. company, provided he has confidence in its
ability to properly oversee the company.
As he mentioned to the board of directors
in October, however, he believes that
Apollo is uniquely qualified to generate
value because of its recent success in
TFM’s space with the acquisition of
Sprouts.
46
Oct. 15, 2015 Minutes, supra note 23, at A31.
47
14D-9, supra note 6, at 20 (A78).
48
Nov. 28 E-mail, supra note 26, at A40.
15
Whereas the 14D-9 states that Ray Berry was willing to consider an equity rollover with a
party other than Apollo, Plaintiff alleges that the omitted portion suggests that the opposite
is the case: that he would be willing to consider such an equity rollover only if he “has
confidence in [the firm’s] ability to properly oversee the company,” and he only had
confidence in one party, namely, Apollo.49 If, as Plaintiff fairly alleges, Ray Berry were
only willing to consider an equity rollover with a qualified party, and Apollo was “uniquely
qualified,” then Ray Berry was not, in fact, willing to consider an equity rollover with
another party.
C. Plaintiff alleges that the 14D-9 failed to disclose Ray
Berry’s “threat” to sell the Company.
Plaintiff alleges that the November 28 E-mail reveals that the 14D-9 is marred by
another material omission: the 14D-9 never mentions that Ray Berry’s counsel emphasized
his client’s belief that the Company needed to go private and that, if it stayed public, Ray
Berry would sell his shares. Specifically, Berry’s attorney stated in the November 28 E-
mail that Ray Berry believed it was “in the best interests of the shareholders for the board
to pursue a sale of the company at this time due to the low valuation of the company in
spite of a built-in buy-out premium as well as the complexity of implementing the changes
[new CEO] Rick Anicetti covered in the earnings release while under the scrutiny of the
public market.”50 But the 14D-9 does not include anything resembling a summary of that
assertion. Berry’s counsel stated further that, “If The Fresh Market remains public, Mr.
49
Id.
50
Id.
16
Berry will give serious consideration to selling his stock when permitted as he does not
believe TFM is well positioned to prosper as a public company and he can do better with
his investment dollars elsewhere.”51 Again, this assertion is missing from the 14D-9.
D. Plaintiff alleges that the 14D-9 misled stockholders about the
Company’s reasons for forming the Strategic Transaction Committee.
Plaintiff alleges that the 14D-9 misled stockholders concerning existing activist
stockholder pressure facing the Company at the time of the October 15, 2015 Board
meeting, when the directors decided to form the Strategic Transaction Committee. The
14D-9 states that the Board decided to form the Committee in order “to enhance efficiency
in light of the fact that TFM could become the subject of shareholder pressure and
communications and potentially additional unsolicited acquisition proposals in light of
TFM’s recent stock performance.”52 It fails to mention that the Company had already
become subject to stockholder pressure and that the Board considered that fact when
deciding to form the Committee. According to the minutes of the October 15 meeting, the
Board discussed “that there had been a significant amount of shareholder outreach recently
regarding the strategic direction of the Corporation in light of the Corporation’s
performance and the trends facing the industry.”53 In particular, the directors addressed a
letter dated October 8, 2015, from activist investor Neuberger Berman LLC, which owned
51
Id.
52
14D-9, supra note 6, at 18 (A76) (emphasis added).
53
Oct. 15, 2015 Minutes, supra note 23, at A32 (emphasis added).
17
3.4% of the Company’s shares.54 The letter listed grievances with The Fresh Market’s
performance and proclaimed that “urgent action is necessary to restore credibility and
prevent further damage to this asset base.”55 Neuberger stated that “it is now time” for the
Board “to initiate a comprehensive strategic review” and “consider in that review hiring
outside financial advisers to assess: (i) a sale of the Company, (ii) possible strategic
partnerships, joint ventures, or alliances, or (iii) other possible internal investments or
external transactions.”56
II.
Reviewing the Court of Chancery’s decision to dismiss the complaint de novo,57 we
reverse because Defendants did not meet their burden for triggering application of the
business judgment rule under Corwin.58
We focus on whether the stockholder vote was fully informed—that is, whether the
Company’s disclosures apprised stockholders of all material information and did not
54
Charles Kantor to Richard Noll, Letter on behalf of Neuberger Berman LLC to Lead Independent
Director of the Board (Oct. 8, 2015), at A26 [hereinafter Neuberger Letter]; Oct. 15, 2015 Minutes,
supra note 23, at A32. Neuberger owned 1.6 million of The Fresh Market’s 47,049,217 total
shares outstanding. Neuberger Letter, at A26; 14D-9, supra note 6, at 1 (A59).
55
Neuberger Letter, supra note 54, at A26.
56
Id. at A27.
57
Brinckerhoff v. Enbridge Energy Co., 159 A.3d 242, 252 (Del. 2017).
58
Corwin, 125 A.3d at 312 n.27 (“The burden to prove that the vote was fair, uncoerced, and fully
informed falls squarely on the board.” (quoting Huizenga, 751 A.2d at 899)); Yiannatsis v.
Stephanis by Sterianou, 653 A.2d 275, 280 (Del. 1995) (“The burden rests on the party claiming
the ratification to establish that the stockholder approval resulted from a fully informed electorate.”
(quoting E. Folk, R. Ward & E. Welch, Folk on the Delaware General Corporate Law § 144.5.2.3
(1992))) (emphasis removed).
18
materially mislead them.59 At the pleading stage, that requires us to consider whether
Plaintiff’s complaint, when fairly read, supports a rational inference that material facts
were not disclosed or that the disclosed information was otherwise materially misleading.60
“An omitted fact is material if there is a substantial likelihood that a reasonable
shareholder would consider it important in deciding how to vote.”61 Framed differently,
an omitted fact is material if there is “a substantial likelihood that the disclosure of the
omitted fact would have been viewed by the reasonable investor as having significantly
altered the ‘total mix’ of information made available.”62 But, to be sure, this materiality
test “does not require proof of a substantial likelihood that disclosure of the omitted fact
would have caused the reasonable investor to change his vote.”63
59
Berkman, 180 A.3d at 1057 (“Precisely because Delaware law gives important effect to an
informed stockholder decision, Delaware law also requires that the disclosures the board makes to
stockholders contain the material facts and not describe events in a materially misleading way.”).
60
See id. at 1064 (reversing a motion to dismiss because the complaint’s “omitted facts are material
and their omission precludes the invocation of the business judgment rule standard at the pleading
stage”); Huizenga, 751 A.2d at 881 (because “[t]he complaint fails to state a claim that the
disclosures in connection with the Merger were misleading or incomplete . . . the business
judgment rule standard of review is invoked . . . .”). We agree with the Chancellor’s statement in
Solera that “a plaintiff challenging the decision to approve a transaction must first identify a
deficiency in the operative disclosure document, at which point the burden would fall to defendants
to establish that the alleged deficiency fails as a matter of law in order to secure the cleansing effect
of the vote.” In re Solera Holdings, Inc. S’holder Litig., 2017 WL 57839, at *8 (Del. Ch. Jan. 5,
2017) (citing Huizenga, 751 A.2d at 890 n.36, in support of this proposition).
61
Rosenblatt v. Getty Oil Co., 493 A.2d 929, 944 (Del. 1985) (quoting TSC Indus., Inc. v.
Northway, Inc., 426 U.S. 438, 449 (1976)).
62
Id. (quoting TSC Indus., 426 U.S. at 449).
63
Id. (quoting TSC Indus., 426 U.S. at 449). We have reaffirmed the TSC standard for materiality,
consistent with the definition of materiality under the federal securities laws, “in a long line of
cases,” most recently in Appel v. Berkman, 180 A.3d at 1063 n.36 (quoting 2 Stephen A. Radin,
The Business Judgment Rule ch. II, § E(3)(a), at 1741 (6th ed. 2009) (collecting cases)).
19
Just as disclosures cannot omit material information, disclosures cannot be
materially misleading. As we said in Arnold v. Society for Savings Bancorp, Inc.,64 “once
defendants traveled down the road of partial disclosure of the history leading up to the
Merger . . . they had an obligation to provide the stockholders with an accurate, full, and
fair characterization of those historic events.”65 And, in Zirn v. VLI Corp.,66 we explained
that, “even a non-material fact can, in some instances, trigger an obligation to disclose
additional, otherwise non-material facts in order to prevent the initial disclosure from
materially misleading the stockholders.”67
Here, the Court of Chancery stated that, if the Plaintiff could adequately allege in
her pleadings that “the apparent robustness of the auction was a sham” and “[Ray] Berry
had already made up his mind that he wished Apollo to be the acquirer and only Apollo
had a shot at winning the auction,” then “surely the disclosures were flawed and inadequate
64
650 A.2d 1270 (Del. 1994).
65
Id. at 1280. But see id. (“Delaware law does not require disclosure of inherently unreliable or
speculative information which would tend to confuse stockholders or inundate them with an
overload of information.”). Our disclosure jurisprudence is conscious of the risks of
overdisclosure, such as “bury[ing] the shareholders in an avalanche of trivial information.”
Solomon v. Armstrong, 747 A.2d 1098, 1130 (Del. Ch. 1999) (internal quotation marks omitted),
aff’d, 746 A.2d 277 (Del. 2000). Assessing whether a given fact is material “requires a careful
balancing of the potential benefits of disclosure against the possibility of resultant harm.” Arnold,
650 A.2d at 1279.
66
681 A.2d 1050 (Del. 1996).
67
Id. at 1056; see also Pfeffer v. Redstone, 965 A.2d 676, 689 (Del. 2009) (“It is well settled that
‘[w]hen fiduciaries undertake to describe events, they must do so in a balanced and accurate
fashion, which does not create a materially misleading impression.’” (quoting Clements v. Rogers,
790 A.2d 1222, 1240 (Del. Ch. 2001))).
20
to allow the vote to serve as a ratification of the Defendants’ actions.”68 But the trial court
rejected Plaintiff’s argument because it found “the facts regarding Berry’s involvement
with Apollo were disclosed” and, thus, “[t]he conclusion that the Plaintiff reaches—that
the auction was a sham—is not supported by the record.”69 Respectfully, we disagree.
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.70 We believe a reasonable stockholder likely would find such
information important because it would have helped the stockholder to reach a materially
more accurate assessment of the probative value of the sale process. These facts include
“troubling facts regarding director behavior,”71 and thus we conclude that there is a
substantial likelihood that they would have altered the total mix of information available
to stockholders.
A. Plaintiff adequately alleges material omissions in the 14D-9
concerning Ray Berry’s “agreement” with Apollo and relationship
with the firm.
Plaintiff alleges that the phrase “as he did in October” in the November 28 E-mail
should have informed directors that Ray Berry had “lied” at their October 15 meeting, but
that agreement and its eventual disclosure to the directors was never disclosed to the
68
Chancery Op., 2017 WL 4317252, at *2.
69
Id. at *3.
70
See Cent. Mortg., 27 A.3d at 536 (“[I]t may, as a factual matter, ultimately prove impossible for
the plaintiff to prove his claims at a later stage of a proceeding, but that is not the test to survive a
motion to dismiss.”); infra note 20.
71
Corwin, 125 A.3d at 312.
21
Company’s stockholders.72 This omission seems to undermine the veracity of Ray Berry’s
statement to the Board that, as of the October 15 meeting, “he had not committed to any
transaction with [Apollo],” as suggested in the Schedule 14D-973 and the minutes.74
We agree with the Plaintiff that this Agreement Omission was material.75 A
reasonable stockholder would want to know the facts showing that Ray Berry had not been
forthcoming with the Board about his agreement with Apollo (among other information
discussed below),76 as directors have an “‘unremitting obligation’ to deal candidly with
their fellow directors.”77 Moreover, a reasonable stockholder would want to know about
this level of commitment to a potential purchaser, in the context of this deal.78
72
See supra note 32.
73
14D-9, supra note 6, at 17-18 (A75-76).
74
Oct. 15, 2015 Minutes, supra note 23, at A31. The Court of Chancery reasoned that, “[t]o the
extent disclosed facts must have demonstrated Berry’s mendacity to the directors, it should have
been equally clear to the stockholders themselves.” Chancery Op., 2017 WL 4317252, at *3. We
do not understand that statement. Plaintiff’s allegation that Ray Berry lied to the directors is not
based on disclosed facts, but rather on November 28 Counsel E-mail obtained through her Section
220 Litigation—particularly the portions omitted from the description of the e-mail in the 14D-9.
Thus, this “mendacity” could not have been clear to stockholders from the face of the disclosures.
75
See Complaint, supra note 11, ¶ 124 (A184).
76
In order for a vote to be fully-informed under Corwin, directors must disclose all those “troubling
facts regarding director behavior” material to a voting stockholder. See Corwin, 125 A.3d at 312;
Solera, 2017 WL 57839, at *9 (citing Corwin, 125 A.3d at 212).
77
HMG/Courtland Properties, Inc. v. Gray, 749 A.2d 94, 119 (Del. Ch. 1999) (quoting Mills Mills
Acquisition Co. v. Macmillan, Inc., 559 A.2d 1261, 1283 (Del. 1989)); see also Hollinger Int’l,
Inc. v. Black, 844 A.2d 1022, 1061 (Del. Ch. 2004) (finding director liable for breach of the
fiduciary duty of loyalty for failing to “fulfill his obligation to be candid to his fellow directors,”
including by “purposely denying the [company’s] board the right to consider fairly and responsibly
a strategic opportunity within the scope of its Strategic Process and diverting that opportunity to
himself.”).
78
Plaintiff also alleges that the existence of an agreement between the Berrys and Apollo indicates
that they “had formed a group with the intention of changing or influencing the control over the
22
Though the 14D-9 does mention certain of Ray Berry’s prior conversations with
Apollo, the 14D-9 avoids implying any agreement with Apollo and limits facts that might
suggest such an impression. For example, whereas the Schedule TO describes the last pre-
October 1 call from Apollo to the Berrys as a call “to confirm they would participate in
such [an equity rollover] transaction,”79 the 14D-9 merely describes it as a “courtesy
call.”80
The 14D-9’s failure to mention Brett Berry also 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. 81 As
Plaintiff alleges, if included, this information would help show that “Ray Berry, Brett Berry
and Apollo had formulated and acted pursuant to a plan to buy Fresh Market at a vulnerable
Company,” and, thus, Section 13(d) of the Securities Exchange Act of 1934 required them to file
a beneficial ownership report on Schedule 13D. But “[t]hey never did so.” Complaint, supra note
11, ¶ 67 (A159).
79
Schedule TO, supra note 36, at 28 (A130).
80
14D-9, supra note 6, at 17 (A75). Moreover, the Schedule TO’s description of the three pre-
October 1 conversations between Apollo’s Jhawar and the Berrys is, at least, somewhat
inconsistent with the statements in the Schedule 14D-9 that Berry “had not been involved in
[Apollo’s] formulation of its proposal,” and that Berry had not committed to the proposal or to
working exclusively with Apollo. See id. Indeed, in addition to the distinction between a “courtesy
call” and a confirmatory one, the Schedule TO indicates that Ray Berry and Jhawar were “long-
time professional and social acquaintances,” and that, before Apollo’s submission of its proposal,
Ray Berry directed Jhawar to speak with his son, Brett, “to explore various structural alternatives
for an equity rollover transaction,” and the two men then “had several communications regarding
potential transaction structures.” Schedule TO, supra note 36, at 27 (A129). Director Defendants’
answering brief includes several block quotations to the Schedule TO. See Director Defendants’
Answering Br. at 18-19, 21, 22-23. But their inclusion does not help the Defendants’ case. The
tension between the 14D-9 and Schedule TO puts stockholders in the untenable position of
determining which one is accurate.
81
Complaint, supra note 11, ¶ 18 (A142).
23
time at the lowest possible price.”82 We agree that Plaintiff’s allegations are sufficient to
prevent invocation of the business judgment rule under Corwin.
B. 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.
Plaintiff adequately alleges that the 14D-9 is materially misleading because it
repeatedly includes statements that imply an openness to consider other bidders, while
omitting Ray Berry’s statements from those same conversations that suggest that he would
actually only consider an equity rollover with Apollo. The 14D-9 posits that, at the October
15 Board meeting, Berry stated that he would be willing to sell his shares for cash to other
potential bidders and that he had not yet committed to Apollo, evoking an impression of
openness.83 Yet the 14D-9 omits that, when asked by the Board’s counsel about an equity
rollover with a party other than Apollo, Ray Berry’s comments indicated that only Apollo
would suffice: he stated that he was unaware of “any other potential private equity buyer
that had experience in the food retail industry with whom he would be comfortable
engaging in an equity rollover.”84 Such omission is material because, if disclosed, a
reasonable stockholder might infer that Berry’s expression of a clear preference for Apollo
82
Id. ¶ 19 (A143). In In re Topps Co. S’holders Litig., 926 A.2d 58 (Del. Ch. 2007), the court
found the proxy statement materially misleading because it evoked “an impression that Topps
managers have been given no assurances about their future by [the prospective purchaser],”
whereas, “[i]n reality, [that potential purchaser] has premised his bid all along as one that is
friendly to management and that depends on their retention.” Id. at 74. Similarly, the 14D-9
presents a misleading impression of the Berrys’ and Apollo’s level of commitment to each other.
83
See 14D-9, supra note 6, at A76.
84
Oct. 15, 2015 Minutes, supra note 23, at A31.
24
and reluctance to engage with other bidders hindered the openness of the sale process,
notwithstanding that Ray Berry also submitted that “he had not committed to any
transaction with Apollo.”85
Even more, the description of the November 28 E-mail includes the statement that
Ray Berry would consider an equity rollover involving another buyer, but it omits the
crucial precondition—that he must have “confidence in [the firm’s] ability to properly
oversee the company”86—and that Berry believed that Apollo was “uniquely qualified to
generate value because of its recent success in TFM’s space with the acquisition of
Sprouts,”87 effectively ruling out other parties despite the 14D-9’s suggestion to the
contrary. 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.”88 Stockholders are “entitled to a balanced
and truthful recitation of events, not a sanitized version that is materially misleading.”89
C. Plaintiff adequately alleges that the 14D-9’s omission
of Ray Berry’s “threat” to sell his shares is material.
Plaintiff adequately alleges that the 14D-9 omits the material statement from the
November 28 E-mail that Ray Berry believed that the Board should pursue a sale of the
85
Id.
86
Nov. 28 E-mail, supra note 26, at A40.
87
Id.
88
Berkman, 180 A.3d at 1064 (quoting 2 Edward P. Welch et. al., Folk on the Delaware General
Corporation Law § 212.04, at 7-78 to 7-79 (6th ed. 2014)).
89
In re Pure Res., Inc., S’holders Litig., 808 A.2d 421, 451 (Del. Ch. 2002).
25
Company “at this time” and that, if it failed to act, he would sell his shares 90—a warning
that Plaintiff characterizes as a threat. We do not embrace Plaintiffs’ characterization of
this as a threat, but we do view it as an economically relevant statement of intent.
The Court of Chancery considered the omission of this so-called “threat” to be the
“only factual lacuna in the disclosures that comes close to materiality.” 91 But the court
dismissed it because it reasoned that “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.”92 That is not the test. Omitted 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.93 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
90
Nov. 28 E-mail, supra note 26, at A40 (“If The Fresh Market remains public, Mr. Berry will
give serious consideration to selling his stock when permitted as he does not believe TFM is well
positioned to prosper as a public company and he can do better with his investment dollars
elsewhere.”).
91
Chancery Op., 2017 WL 4317252, at *3.
92
Id.93
See Berkman, 180 A.3d at 1057-58, 1064.
26
of whether it actually sways a stockholder one way or the other, as a single piece of
information rarely drives a stockholder’s vote.94
Further, the November 28 E-mail included Berry’s counsel’s communication of the
reason why Ray Berry believed that it was time to sell the Company.95 A reasonable
stockholder would want to know the rationale that Ray Berry gave the Board in
encouraging it to pursue the sale, as well as his communication of his intent to sell his
shares if a transaction were not consummated.96
D. Plaintiff adequately alleges that the 14D-9’s presentation of the
Board’s reasons for forming the Strategic Transaction Committee are
materially misleading.
Plaintiff alleges that the 14D-9 “conceals the pressure on the Board from activist
stockholders to sell the Company.”97 But the trial court dismissed that argument, finding
94
Radin, supra note 63, ch. II, § E(3)(a), at 1746 (“To establish materiality, ‘it need not be shown
that an omission or distortion would have made an investor change his overall view of a proposed
transaction’ or that ‘the information be of such import that its revelation would cause an investor
to change his vote,’ but ‘it must be shown that the fact in question would have been relevant to
him.’” (quoting Zirn v. VLI Corp., 621 A.2d 773, 779 (Del. 1993))); 1 R. Franklin Balotti & Jesse
A. Finkelstein, The Delaware Law of Corporations and Business Organizations § 17.2[B][1] (3d
ed.) (“Although the omission or distortion need not be shown to have made an investor change his
vote or overall view of a proposed transaction, to be material it need only be demonstrated that the
fact in question, when considered under all circumstances, would assume actual significance in the
deliberations of a reasonable shareholder.”).
95
See Nov. 28 E-mail, supra note 26, at A40 (noting that Ray Berry believed it to be an opportune
time to sell the Company because of “low valuation of the company in spite of a built-in buy-out
premium as well as the complexity of implementing the changes [new CEO] Rick Anicetti covered
in the earnings release while under the scrutiny of the public market”).
96
Berkman, 180 A.3d at 1062 (“It is inherent in the very idea of a fiduciary relationship that the
stockholders that directors serve are entitled to give weight to their fiduciaries’ opinions about
important business matters.”).
97
Complaint, supra note 11, ¶ 122 (A182).
27
the existing disclosures sufficient.98 That was error. The 14D-9 did disclose that, at the
October 15, 2015 Board meeting, the Board decided to create the Committee “to enhance
efficiency in light of the fact that TFM could become the subject of shareholder pressure
and communications and potentially additional unsolicited acquisition proposals in light of
TFM’s recent stock performance.”99 However, the minutes of that meeting reveal that the
14D-9 omits an important point: the Company had actually already become subject to
stockholder pressure. In fact, before forming the Committee, the Board discussed “that
there had been a significant amount of shareholder outreach recently regarding the
strategic direction of the Corporation.”100 We believe there is more than a semantic
difference between the possibility that there “could” be stockholder pressure, as suggested
in the 14D-9, and “there had been a significant amount of shareholder outreach recently,”
as revealed in the minutes. Given the Company chose to speak on the topic, stockholders
were entitled to know the depth and breadth of the pressure confronting the Company,
especially given that it already existed.101
98
Chancery Op., 2017 WL 4317252, at *3.
99
14D-9, supra note 6, at 18 (A76) (emphasis added).
100
Oct. 15, 2015 Minutes, supra note 23, at A32 (emphasis added). In particular, the directors
discussed the Neuberger letter—an example of such activist outreach. See id.; Neuberger Letter,
supra note 54, at A26. The 14D-9 fails to mention that letter altogether.
101
See Balotti & Finkelstein, supra note 95, § 17.2 (“Although the board generally is not required
to disclose all of the ‘bends and turns in the road’ in summarizing a proposed transaction, the
Delaware Supreme Court has suggested that, once a board travels down the path of describing its
process, it has a duty to provide a full and fair characterization of events.” (quoting McMillan v.
Intercargo Corp., 1999 WL 288128, at *9 (Del. Ch. May 3, 1999))).
28
III.
As in Berkman, “given the nature of the omission[s],” we decline “defendants’
invitation for us to find another ground for affirmance, such as reliance on the exculpatory
charter provision, which was not addressed by the Court of Chancery.”102
For the reasons set forth above, we REVERSE the Court of Chancery’s opinion and
REMAND for proceedings consistent with this opinion.
102
Berkman, 180 A.3d at 1064-65.
29