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Chancery Sustains Claims Against Board Chairman who Rolled Over Equity in Going-Private Transaction and Officers Who Crafted Misleading Disclosures

Posted In Fiduciary Duty, M&A

Morrison v. Berry, C.A. No. 12808-VCG (Del. Ch. Dec. 31, 2019).

Plaintiff, a former stockholder of The Fresh Market, Inc. (the “Company”), brought claims arising out Apollo’s 2016 acquisition of the Company.

Because the directors benefited from exculpation under 8 Del. C. §102(b)(7), the plaintiff was required to sufficiently plead a breach of the fiduciary duty of loyalty. The Court rejected the novel argument that activist shareholders were exerting so much pressure on the board that the directors were motivated to protect their own reputations by approving a near-term sale. The Court reasoned that the directors’ reputations would be at far greater risk if they breached their duty of loyalty by orchestrating a sham auction, and that it would be irrational for them to harm their own pecuniary interests as shareholders. The Court also reasoned that, while they could have chosen other potentially value-enhancing paths, the decision to hold an auction and solicit bids from a wide field did not suggest “bad faith.” 

The Court denied a motion to dismiss filed by Ray Berry, a large stockholder who also served as the board’s Chairman, and who had agreed to roll over his equity. The allegations supported an inference that, with knowledge that the Company was considering strategic alternatives, he secretly partnered with Apollo on a potential transaction for months before disclosing his contacts to his fellow directors. Compounding the situation, he also allegedly downplayed the extent of his involvement with Apollo. While he then recused himself from all deliberations, the Court reasoned it was conceivable that “nearly five months of serious misinformation regarding [his] relationship with the strongest prospective buyer created a harm.”

Regarding disclosures to stockholders, the plaintiff failed to allege conscious or intentional (i.e., disloyal) disclosure violations by the directors, which was needed to plead non-exculpated claims against them. The Company’s General Counsel and its Chief Executive Officer, however, were not subject to exculpation under 8 Del. C. § 102(b)(7), which applies only to directors acting as such. Accordingly, they could be liable for breaching their duty of care by grossly negligent acts or omissions in preparing the disclosures, which the Court found was adequately alleged. The Court accordingly denied their motions to dismiss.