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From Securities Regulation Daily, July 9, 2018

Court reverses chancery’s application of Corwin doctrine

By Anne Sherry, J.D.

The Delaware Supreme Court reversed a chancery court decision for erroneously concluding that Corwin cleansed a go-private deal involving a tender offer. Two-thirds of The Fresh Market’s shareholders accepted the tender offer, but they were not fully informed—among other things, the Schedule 14D-9 recommending acceptance did not disclose that the company’s founder did not consider partnering with any private equity firm other than Apollo Global Management (Morrison v. Berry, July 9, 2018, Valihura, K.).

The stockholder plaintiff brought suit for breach of fiduciary duty while the tender offer was still pending, although the offer closed before she was able to obtain books and records via her Section 220 demand. The plaintiff claimed that the founder and his son teamed up with Apollo to buy The Fresh Market at a discount while misleading the board and stockholders that he would consider other private equity firms. The chancery court granted the defendants’ motion to dismiss under the Corwin doctrine, which applies the business judgment rule to a post-closing damages action in a merger (not subject to entire fairness) that was approved by a fully informed, uncoerced majority of disinterested stockholders.

Apollo’s initial indication of interest to the board, on October 1, 2015, stated that the firm had an "exclusive partnership" with the founder and his son. The board held a meeting two weeks after this letter and asked the founder if he had an agreement with Apollo; he said no and recused himself from the meeting. Apollo withdrew its proposal but reaffirmed it in late November, again stating that it was making the proposal together with the cofounder and his son. Again, the company sought clarification; the founder’s counsel’s November 28 response referred to an agreement that the founder had with Apollo in October. The sale process officially began on December 3 after a two-day board meeting.

Plaintiff’s allegations. The plaintiff alleged that the November 28 email indicated that the Fresh Market founder had an agreement to roll over his equity interest if Apollo reached a deal to purchase the company, but not only did the 14D-9 not mention that agreement, it suggested that no agreement ever existed. The schedule undermined any impression of an agreement, and its omission of any mention of the founder’s son in the description of Apollo’s contacts with the founder prior to October was allegedly material because stockholders would have become informed that the board blinded itself to the agreement among these parties.

The plaintiff also alleged that the 14D-9 gave a misleading impression that the founder would consider offers from potential purchasers other than Apollo. The form omitted a portion of the November 28 email that suggested the founder would only consider another party if he had confidence in that firm’s ability to properly oversee the company, and he only had confidence in Apollo. The schedule also omitted to disclose the founder’s intentions to sell his stock if the company remained private and misled stockholders by stating that the board formed a transaction committee in light of potential shareholder pressure, when the company was already under pressure from activist stockholders.

Corwin unavailable. The high court found that the plaintiff identified deficiencies in the disclosures sufficient to deny Corwin cleansing. These included troubling facts regarding director behavior, raising the substantial likelihood that they would have altered the total mix of information. The court stopped short of agreeing that the founder’s talk of selling his shares amounted to a "threat," but said that it did "view it as an economically relevant statement of intent." Even while it considered this omission the closest to material among the plaintiff’s alleged deficiencies, the chancery court dismissed it because "it would not have made investors less likely to tender." The high court wrote, however, that this is not the test for materiality:

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

The chancery court also erred in dismissing the plaintiff’s argument that the 14D-9 concealed the pressure from activist stockholders. Given that the company chose to speak on the topic of stockholder pressure, stockholders were entitled to know the depth and breadth of that pressure, including that it already existed.

The case is No. 445, 2017.

Attorneys: Joel Friedlander (Friedlander & Gorris, P.A.) for Elizabeth Morrison. John L. Reed (DLA Piper) for Ray Berry.

Companies: The Fresh Market; Apollo Global Management LLC

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