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High Court Again Denies 'Corwin' Deference Due to Material Omissions Concerning Sale Process
Earlier this year, the Delaware Supreme Court held that Corwin deference was not warranted where a recommendation statement to stockholders disclosed that a founder and board chairman abstained from recommending in favor of an M&A transaction, but omitted certain facts evident from meeting minutes, such as his disappointment with the company’s management and the transaction price, and his view that it was not the right time to sell. See Appel v. Berkman, 180 A.3d 1055 (Del. 2018).
The Supreme Court’s decision last week in Morrison v. Berry, __ A.3d ___, 2018 WL 3339992 (Del. Jul. 9) similarly examined whether material information about a founder and chairman’s role in a sale process was withheld from stockholders. In holding that Corwin deference was not warranted, the court elided upon the materiality standard, and again focused on discrepancies between the recommendation statement and board minutes and other internal corporate documents.
The action is a stockholder challenge to Apollo Management April 2016 acquisition of The Fresh Market in a going-private transaction. Over 68 percent of the company’s outstanding shares sold into a first-step tender offer, which was followed by a merger under 8 Del. C. Section 251(h). The company’s recommendation statement disclosed that Ray Berry—the company’s founder, chairman and former CEO—and his son intended to roll over their equity, increasing their collective ownership percentage from 9.8 percent to roughly 20 percent.
A stockholder who suspected breaches of fiduciary duties sought books and records under 8 Del. C. Section 220, sued to enforce her inspection rights and received “several key documents, such as board minutes and a crucial email from Mr. Berry’s counsel to company lawyers.” Morrison, 2018 WL 3339992, at *2. The stockholder then filed suit against the company’s board of directors and the younger Berry for allegedly inducing the board to put the company up for sale and skewing the process in favor of Apollo. The defendants moved to dismiss due to stockholder ratification under Corwin. When the Delaware Court of Chancery granted that motion, the stockholder appealed, arguing that the recommendation statement evinced disclosure violations concerning the Berrys’ contacts with Apollo and other material information.
The Supreme Court’s Decision
The Supreme Court reasoned that “[c]areful application of Corwin is important due to its potentially case-dispositive impact.” Morrison, 2018 WL 3339992, at *2. The issue of whether Corwin deference was warranted turned on whether the plaintiff’s complaint “supports a rational inference that material facts were not disclosed or that the disclosed information was otherwise materially misleading.” Id. at *9. The court emphasized that the materiality test examines only whether there is a substantial likelihood that the omitted fact would have significantly altered the total mix of information available to an investor, and not whether it would have caused her to change her vote. In this regard, the court agreed that the recommendation statement omitted information that “would have helped the stockholder to reach a materially more accurate assessment of the probative value of the sale process.” Id. at *10. Indeed, the court reasoned the omissions included “troubling facts regarding director behavior,” of the kind that the Corwin court reasoned would prevent ratification if omitted. Id.
The court first considered the description of a Nov. 28, 2015, email from Berry’s counsel to the company’s counsel, which was sent after Apollo had made and withdrew an offer in October only to make the same offer again on Nov. 25. Counsel’s email stated that Berry had one conversation with Apollo in the interim, during which “he agreed, as he did inOctober” to roll over his equity interest if Apollo reached an agreement with the company. The recommendation statement omitted any reference to an agreement in October, which plaintiff argued was a material in itself, and particularly so given that it undermined the veracity of Berry’s claim at an Oct. 15 board meeting, reiterated in the recommendation statement, that he had not committed to a transaction with Apollo. Holding that this adequately alleged a disclosure violation, the Supreme Court agreed that a reasonable stockholder would want to know facts suggesting Berry had not been forthcoming with the board, as well as his level of commitment to a potential acquirer in the context of this deal.
Moreover, the recommendation statement also suggested that Berry was open to working with other bidders, disclosing that at the Oct. 15 board meeting Berry stated “in the event another buyer … were to acquire [the company], Mr. Berry would also consider rolling his equity interest over in such a transaction.” The Oct. 15 minutes indicated, however, that Berry also stated that “he was not aware 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.” The Supreme Court agreed that this omission was adequately alleged to be material, because a reasonable stockholder might infer from it that Berry’s expression of a preference for Apollo hindered the sale process.
The Nov. 28 email from Berry’s counsel also stated that Berry believed it was in the best interests of the company to pursue a sale due to the company’s low valuation and the complexity of implementing certain changes, and that if the company remained public, Berry would “give serious consideration to selling his stock when permitted as he does not believe [the company] is well positioned to prosper as a public company and he can do better with his investment dollars elsewhere.” The Supreme Court considered this to be “an economically relevant statement of intent” that could make a stockholder more likely to tender. Morrison, 2018 WL 3339992, at *12. In any event, it would be material even if it is “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.” Id. at *12. This, too, adequately alleged a disclosure violation.
Finally, the recommendation statement disclosed that, at the Oct. 15 meeting, the board formed a strategic transaction committee because the company “could become the subject of shareholder pressure and communications and potentially additional unsolicited acquisition proposals in light of [the company’s] recent stock performance.” In fact, the Oct. 15 minutes indicated that the board discussed “that there had been a significant amount of shareholder outreach recently …” in light of the company’s performance and industry trends. In particular, the company had received a letter from an activist investor who owned 3.4 percent of the company’s shares requesting “urgent action to restore credibility and prevent further damage” and a “comprehensive strategic review” to assess selling the company or other strategic transactions. In finding this discrepancy material, the Supreme Court reasoned that because “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.” Morrison, 2018 WL 3339992, at *13.
The Supreme Court concluded that, “as in Berkman, ‘given the nature of the omission[s],’ we decline ‘defendants’ invitation for us to find another ground for affirmance’” not addressed by the Court of Chancery. Morrison, 2018 WL 3339992, at *13. The Supreme Court accordingly reversed and remanded the matter to the Court of Chancery.
At the outset of its opinion, the Supreme Court stated that the case “offers a cautionary reminder to directors and the attorneys who help them craft their disclosures: ‘partial and elliptical disclosures’ cannot facilitate the protection of the business judgment rule under the Corwin doctrine.” Morrison, 2018 WL 3339992, at *1 (quoting Arnold v. Soc’y for Sav. Bancorp, 650 A.2d 1270, 1280 (Del. 1994)). More generally, the Morrison and Berkmandecisions could be read to signal that courts presented with defendants’ arguments that Corwin prevents meaningful judicial review may employ the “materiality” standard broadly to consider whether the omitted information might be considered important in the circumstances at issue.
In addition, both the Morrison and Berkman decisions notably involved stockholders who sought books and records pursuant to 8 Del. C. Section 220 prior to bringing suit—a practice also endorsed by the Court of Chancery’s late 2017 decision in Lavin v. West, 2017 WL 6728702 (Del. Ch. Dec. 29, 2017). Together, these decisions support that stockholder-plaintiffs who are willing to invest resources in a pre-suit books and record demand may have a viable path to a post-Corwin claim. On the other side of that coin, these decisions strongly support that target companies and boards who hope for Corwin deference should err on the side of ensuring that potentially material facts reflected in board minutes and other internal documents are fully disclosed.