Beware of partial and elliptical disclosures to stockholders in M&A transactions

Blog Post

Recent developments in a lawsuit against a Delaware grocery store chain serve as a prime example of why you should beware of partial and elliptical disclosures to stockholders in M&A transactions. 

Apollo Management acquires Fresh Market 

The Fresh Market, a Delaware corporation that owned a grocery store chain, was acquired by Apollo Management, L.P., through a merger that involved rolling over Fresh Market founder, director and stockholder Ray Berry’s equity ownership into the acquirer as part of the transaction. Approximately 80 percent of the outstanding shares of the Fresh Market were tendered into the merger. As an insider and board member of the Fresh Market, Ray Berry spoke with potential investors and favored a deal with Apollo. Berry recused himself from consideration of a potential sale by the board and waived notice of any meetings at which strategic alternatives would be discussed. The remainder of the board consisted of eight independent directors. 

The independent directors created a special committee of three independent directors to consider strategic alternatives and engaged J.P. Morgan Securities to conduct a sale process. Thirty-two potential bidders were solicited and the board received five indications of interest over a five-month process. Apollo was declared the successful bidder and the board approved the equity tender discussed above. 

Stockholder files breach of fiduciary duty lawsuit

Elizabeth Morrison, a stockholder in Fresh Market, filed a breach of fiduciary duty lawsuit against Ray Berry and the independent directors in the Court of Chancery of the State of Delaware alleging that the tender was uninformed and that the disclosures made to stockholders were insufficient. The primary allegation was that the disclosures provided to stockholders contained insufficient information regarding the conservative nature of management’s projections and lacked disclosure of sensitivities to those projections. Morrison further alleged that Berry had already made up his mind that Apollo should be the winning bidder and therefore no other interested acquirer had a shot in the auction process. 

The courts weigh in

The Delaware Chancery Court granted a motion to dismiss filed by the defendants stating that the tender of the majority of shares was not coerced and that Berry’s connection to Apollo was adequately disclosed. Morrison appealed that decision to the Delaware Supreme Court. 

On July 9, 2018, the Delaware Supreme Court reversed the decision of the Delaware Chancery Court on the grounds that the disclosures at issue did not fully reflect all material facts of the transaction at issue to the Market’s stockholders. In addition, the Delaware Supreme Court declined to apply the Corwin doctrine established by the Delaware Supreme Court in Corwin v. KKR Financial Holdings LLC (Del. Oct. 2, 2015). In Corwin, the Delaware Supreme Court held that in a merger transaction with a party other than a controlling shareholder, the business judgment standard of review will apply where the voluntary, fully-informed, and uncoerced judgment of the majority of the disinterested shareholders to approve the transaction was obtained. 

The Delaware Supreme Court held in Morrision v. Berry (2018 BL 241459, Del., No. 445, 2017, 7/9/18) that directors and attorneys that help craft disclosures of transactions to stockholders must reflect all material facts in order for the transaction parties to benefit from the Corwin business judgment standard. The Corwin business judgment standard will not apply to stockholder-approved transactions involving “partial and elliptical” disclosures that leave stockholders less than fully informed.


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