Elizabeth Morrison v. Ray Berry
This text of Elizabeth Morrison v. Ray Berry (Elizabeth Morrison v. Ray Berry) is published on Counsel Stack Legal Research, covering Court of Chancery of Delaware primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.
Opinion
IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
ELIZABETH MORRISON, individually ) and on behalf of all others similarly ) situated, ) ) Plaintiff, ) ) v. ) C.A. No. 12808-VCG ) RAY BERRY, RICHARD A. ) ANICETTI, MICHAEL D. CASEY, ) JEFFREY NAYLOR, RICHARD NOLL, ) BOB SASSER, ROBERT K. SHEARER, ) MICHAEL TUCCI, STEVEN TANGER, ) JANE THOMPSON, BRETT BERRY, ) SCOTT DUGGAN, CRAVATH, ) SWAINE & MOORE LLP, JPMORGAN ) CHASE & CO., J.P. MORGAN ) SECURITIES, LLC, POMEGRANATE ) HOLDINGS, INC., APOLLO ) INVESTMENT FUND VIII, L.P., ) APOLLO OVERSEAS PARTNERS ) (DELAWARE 892) VIII, L.P., APOLLO ) OVERSEAS PARTNERS ) (DELAWARE) VIII, L.P., APOLLO ) OVERSEAS PARTNERS VIII, L.P., ) APOLLO ADVISORS VIII, L.P., ) APOLLO MANAGEMENT VIII, L.P., ) AIF VIII MANAGEMENT, LLC, ) APOLLO MANAGEMENT, L.P., ) APOLLO MANAGEMENT GP, LLC, ) APOLLO MANAGEMENT ) HOLDINGS, L.P., APOLLO ) MANAGEMENT HOLDINGS GP, LLC, ) APO CORP, AP PROFESSIONAL ) HOLDINGS, L.P., and APOLLO ) GLOBAL MANAGEMENT, LLC, ) ) Defendants. ) MEMORANDUM OPINION
Date Submitted: September 23, 2019 Date Decided: December 31, 2019
Joel Friedlander, Jeffrey M. Gorris, and Christopher P. Quinn, of FRIEDLANDER & GORRIS, P.A., Wilmington, Delaware; OF COUNSEL: Randall J. Baron and Christopher H. Lyons, of ROBBINS GELLER RUDMAN & DOWD LLP, San Diego, California, Attorneys for Plaintiff.
Rudolf Koch, Matthew D. Perri, and John M. O’Toole, of RICHARDS, LAYTON & FINGER, P.A., Wilmington, Delaware; OF COUNSEL: Adam L. Sisitsky, Lavinia M. Weizel, Robert I. Bodian, and Scott A. Rader of MINTZ, LEVIN, COHN FERRIS, GLOVSKY AND POPEO, P.C. New York, New York and Boston, Massachusetts, Attorneys for Independent Director Defendants.
William B. Chandler III, Bradley D. Sorrels, Lindsay K. Faccenda, and Daniyal M. Iqbal, of WILSON SONSINI GOODRICH & ROSATI, P.C., Wilmington, Delaware, Attorneys for Scott Duggan, Defendant.
Patricia L. Enerio, Jamie L. Brown, and Gillian L. Andrews, of HEYMAN ENERIO GATTUSO & HIRZELL LLP, Wilmington, Delaware, Attorneys for Richard A. Anicetti, Defendant.
Kevin G. Abrams, J. Peter Shindel, Jr., and Matthew L. Miller, of ABRAMS & BAYLISS LLP, Wilmington, Delaware; OF COUNSEL: Matthew A. Schwartz and Joshua S. Levy of SULLIVAN & CROMWELL LLP, New York, New York, Attorneys for JPMorgan Chase & Co. and J.P. Morgan Securities, LLC, Defendants.
William M. Lafferty, S. Mark Hurd, Thomas W. Briggs, Jr., Richard Li, and Elizabeth A. Mullin, of MORRIS, NICHOLS, ARSHT & TUNNELL LLP, Wilmington, Delaware; OF COUNSEL: Stuart W. Gold, Richard W. Clary, of CRAVATH, SWAINE & MOORE LLP, New York, New York, Attorneys for Cravath, Swaine & Moore, LLP, Defendant.
Kevin R. Shannon, Matthew F. Davis, and Nicholas S. Prust, of POTTER ANDERSON & CORROON LLP, Wilmington, Delaware; OF COUNSEL: Jonathan Rosenberg and Abby F. Rudzin of O’MELVENY & MYERS LLP, New York, New York, Attorneys for Apollo Defendants. 2 John L. Reed and Peter H. Kyle, of DLA PIPER LLP, Wilmington, Delaware; OF COUNSEL: David Clarke, Jr., of DLA PIPER LLP, Washington, D.C., Attorneys for Berry Defendants.
GLASSCOCK, Vice Chancellor
3 This matter involves the Plaintiff’s claims for damages following the purchase
of a grocery-store chain, The Fresh Market, Inc. (“Fresh Market” or the “Company”)
by Apollo investment entities. The Plaintiff is a former stockholder of the Company,
purportedly acting on behalf of the stockholder class. She alleges that certain Fresh
Market fiduciaries breached their duties in negotiating the sale and in obtaining the
assent of the stockholders. The matter was previously the subject of a motion to
dismiss, which I granted based on the fact of the approval of the merger by a majority
of disinterested stockholders; that decision was reversed on appeal. The matter is
now before me on the balance of the motions to dismiss, alleging failure to state a
claim under Chancery Court Rule 12(b)(6). For the following reasons, I determine
that the motions of several Defendants must be denied. The complaint, however,
fails to state a claim against the Director Defendants, and their motion is granted.
I. BACKGROUND
I draw the following facts from the Plaintiff’s Verified Second Amended
Complaint (the “SAC”) and to a limited extent from documents incorporated
therein.1 This Opinion decides the motions to dismiss for those Defendants with
1 Verified Sec. Am. Compl., Docket Item (“D.I.”) 169 (“SAC”). The Plaintiff received documents previously through her Section 220 action, some of which she relies on in the SAC. To that extent, I take these documents into consideration with regard to the motions to dismiss. See Freedman v. Adams, 2012 WL 1345638, at *5 (Del. Ch. Mar. 30, 2012) (permitting review of documents incorporated into the complaint in a Rule 23.1 action), aff’d, 57 A.3d 414 (Del. 2015); Amalgamated Bank v. Yahoo! Inc., 132 A.3d 752, 797 (Del. Ch. 2016)) (“[A] plaintiff may not reference certain documents outside the complaint and at the same time prevent the court from fiduciary duties, and reserves decision on those Defendants facing aiding and
abetting claims; therefore, in this Opinion, I focus on the facts necessary to decide
the motions to dismiss filed by those Defendants with fiduciary duties. The well-
pled allegations of the SAC, as discussed further below, are assumed true for
purposes of this Opinion.
A. The Parties and Relevant Non-Parties
Non-party Fresh Market is a Delaware corporation headquartered in North
Carolina that operates as a specialty grocery retailer.2
Plaintiff Elizabeth Morrison was, at all relevant times, a stockholder of Fresh
Market.3
Defendant Ray Berry was Fresh Market’s Chairman of the Board and former
CEO. 4 Defendant Brett Berry, Ray Berry’s son, was a former CEO and Vice
Chairman of the Board.5 Prior to the transaction, Ray and Brett Berry together
owned approximately 9.8% of Fresh Market’s shares, and approximately 22% of
Fresh Market equity after the deal closed. 6 Ray Berry’s son-in-law, Michael Barry,
considering those documents’ actual terms.” (quoting Winshall v. Viacom Int’l, Inc., 76 A.3d 808, 818 (Del. 2013))). 2 SAC, ¶ 25. 3 Id. ¶ 24. 4 Id. ¶ 26. 5 Id. ¶ 27. Brett Berry was not a director, officer, or employee of Fresh Market during any period relevant to this litigation. See Id. 6 Id. ¶ 2.
2 owned approximately 6% of Fresh Market stock prior to the transaction.7 For
clarity’s sake, because this Opinion decides the Berrys’ Motion to Dismiss only as
it concerns Ray Berry, when I refer to “Berry,” I am referring to Ray Berry.
Defendants Michael Casey, Jeffrey Naylor, Richard Noll, Bob Sasser, Robert
Shearer, Steven Tanger, Jane Thompson, and Michael Tucci (collectively, with
Richard Anicetti, the “Director Defendants”) were members of the Fresh Market
board of directors (the “Board”).8
Defendant Scott Duggan was Fresh Market’s Chief Legal Officer and Senior
Vice president – General Counsel. 9
Defendant Richard Anicetti, in addition to being a director on the Board, was
Fresh Market’s President and CEO.10
Defendant Cravath, Swaine & Moore LLP (“Cravath”) is a New York limited
liability partnership that served as Fresh Market’s legal counsel for the transaction.11
Defendant JPMorgan Chase & Co., is a Delaware corporation and parent to
Defendant J.P. Morgan Securities, LLC (“J.P. Morgan”), a Delaware limited liability
7 Id. 8 Id. ¶ 28. 9 Id. ¶ 29. 10 Id. ¶ 28. 11 Id. ¶ 30.
3 company. 12 J.P.
Free access — add to your briefcase to read the full text and ask questions with AI
IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
ELIZABETH MORRISON, individually ) and on behalf of all others similarly ) situated, ) ) Plaintiff, ) ) v. ) C.A. No. 12808-VCG ) RAY BERRY, RICHARD A. ) ANICETTI, MICHAEL D. CASEY, ) JEFFREY NAYLOR, RICHARD NOLL, ) BOB SASSER, ROBERT K. SHEARER, ) MICHAEL TUCCI, STEVEN TANGER, ) JANE THOMPSON, BRETT BERRY, ) SCOTT DUGGAN, CRAVATH, ) SWAINE & MOORE LLP, JPMORGAN ) CHASE & CO., J.P. MORGAN ) SECURITIES, LLC, POMEGRANATE ) HOLDINGS, INC., APOLLO ) INVESTMENT FUND VIII, L.P., ) APOLLO OVERSEAS PARTNERS ) (DELAWARE 892) VIII, L.P., APOLLO ) OVERSEAS PARTNERS ) (DELAWARE) VIII, L.P., APOLLO ) OVERSEAS PARTNERS VIII, L.P., ) APOLLO ADVISORS VIII, L.P., ) APOLLO MANAGEMENT VIII, L.P., ) AIF VIII MANAGEMENT, LLC, ) APOLLO MANAGEMENT, L.P., ) APOLLO MANAGEMENT GP, LLC, ) APOLLO MANAGEMENT ) HOLDINGS, L.P., APOLLO ) MANAGEMENT HOLDINGS GP, LLC, ) APO CORP, AP PROFESSIONAL ) HOLDINGS, L.P., and APOLLO ) GLOBAL MANAGEMENT, LLC, ) ) Defendants. ) MEMORANDUM OPINION
Date Submitted: September 23, 2019 Date Decided: December 31, 2019
Joel Friedlander, Jeffrey M. Gorris, and Christopher P. Quinn, of FRIEDLANDER & GORRIS, P.A., Wilmington, Delaware; OF COUNSEL: Randall J. Baron and Christopher H. Lyons, of ROBBINS GELLER RUDMAN & DOWD LLP, San Diego, California, Attorneys for Plaintiff.
Rudolf Koch, Matthew D. Perri, and John M. O’Toole, of RICHARDS, LAYTON & FINGER, P.A., Wilmington, Delaware; OF COUNSEL: Adam L. Sisitsky, Lavinia M. Weizel, Robert I. Bodian, and Scott A. Rader of MINTZ, LEVIN, COHN FERRIS, GLOVSKY AND POPEO, P.C. New York, New York and Boston, Massachusetts, Attorneys for Independent Director Defendants.
William B. Chandler III, Bradley D. Sorrels, Lindsay K. Faccenda, and Daniyal M. Iqbal, of WILSON SONSINI GOODRICH & ROSATI, P.C., Wilmington, Delaware, Attorneys for Scott Duggan, Defendant.
Patricia L. Enerio, Jamie L. Brown, and Gillian L. Andrews, of HEYMAN ENERIO GATTUSO & HIRZELL LLP, Wilmington, Delaware, Attorneys for Richard A. Anicetti, Defendant.
Kevin G. Abrams, J. Peter Shindel, Jr., and Matthew L. Miller, of ABRAMS & BAYLISS LLP, Wilmington, Delaware; OF COUNSEL: Matthew A. Schwartz and Joshua S. Levy of SULLIVAN & CROMWELL LLP, New York, New York, Attorneys for JPMorgan Chase & Co. and J.P. Morgan Securities, LLC, Defendants.
William M. Lafferty, S. Mark Hurd, Thomas W. Briggs, Jr., Richard Li, and Elizabeth A. Mullin, of MORRIS, NICHOLS, ARSHT & TUNNELL LLP, Wilmington, Delaware; OF COUNSEL: Stuart W. Gold, Richard W. Clary, of CRAVATH, SWAINE & MOORE LLP, New York, New York, Attorneys for Cravath, Swaine & Moore, LLP, Defendant.
Kevin R. Shannon, Matthew F. Davis, and Nicholas S. Prust, of POTTER ANDERSON & CORROON LLP, Wilmington, Delaware; OF COUNSEL: Jonathan Rosenberg and Abby F. Rudzin of O’MELVENY & MYERS LLP, New York, New York, Attorneys for Apollo Defendants. 2 John L. Reed and Peter H. Kyle, of DLA PIPER LLP, Wilmington, Delaware; OF COUNSEL: David Clarke, Jr., of DLA PIPER LLP, Washington, D.C., Attorneys for Berry Defendants.
GLASSCOCK, Vice Chancellor
3 This matter involves the Plaintiff’s claims for damages following the purchase
of a grocery-store chain, The Fresh Market, Inc. (“Fresh Market” or the “Company”)
by Apollo investment entities. The Plaintiff is a former stockholder of the Company,
purportedly acting on behalf of the stockholder class. She alleges that certain Fresh
Market fiduciaries breached their duties in negotiating the sale and in obtaining the
assent of the stockholders. The matter was previously the subject of a motion to
dismiss, which I granted based on the fact of the approval of the merger by a majority
of disinterested stockholders; that decision was reversed on appeal. The matter is
now before me on the balance of the motions to dismiss, alleging failure to state a
claim under Chancery Court Rule 12(b)(6). For the following reasons, I determine
that the motions of several Defendants must be denied. The complaint, however,
fails to state a claim against the Director Defendants, and their motion is granted.
I. BACKGROUND
I draw the following facts from the Plaintiff’s Verified Second Amended
Complaint (the “SAC”) and to a limited extent from documents incorporated
therein.1 This Opinion decides the motions to dismiss for those Defendants with
1 Verified Sec. Am. Compl., Docket Item (“D.I.”) 169 (“SAC”). The Plaintiff received documents previously through her Section 220 action, some of which she relies on in the SAC. To that extent, I take these documents into consideration with regard to the motions to dismiss. See Freedman v. Adams, 2012 WL 1345638, at *5 (Del. Ch. Mar. 30, 2012) (permitting review of documents incorporated into the complaint in a Rule 23.1 action), aff’d, 57 A.3d 414 (Del. 2015); Amalgamated Bank v. Yahoo! Inc., 132 A.3d 752, 797 (Del. Ch. 2016)) (“[A] plaintiff may not reference certain documents outside the complaint and at the same time prevent the court from fiduciary duties, and reserves decision on those Defendants facing aiding and
abetting claims; therefore, in this Opinion, I focus on the facts necessary to decide
the motions to dismiss filed by those Defendants with fiduciary duties. The well-
pled allegations of the SAC, as discussed further below, are assumed true for
purposes of this Opinion.
A. The Parties and Relevant Non-Parties
Non-party Fresh Market is a Delaware corporation headquartered in North
Carolina that operates as a specialty grocery retailer.2
Plaintiff Elizabeth Morrison was, at all relevant times, a stockholder of Fresh
Market.3
Defendant Ray Berry was Fresh Market’s Chairman of the Board and former
CEO. 4 Defendant Brett Berry, Ray Berry’s son, was a former CEO and Vice
Chairman of the Board.5 Prior to the transaction, Ray and Brett Berry together
owned approximately 9.8% of Fresh Market’s shares, and approximately 22% of
Fresh Market equity after the deal closed. 6 Ray Berry’s son-in-law, Michael Barry,
considering those documents’ actual terms.” (quoting Winshall v. Viacom Int’l, Inc., 76 A.3d 808, 818 (Del. 2013))). 2 SAC, ¶ 25. 3 Id. ¶ 24. 4 Id. ¶ 26. 5 Id. ¶ 27. Brett Berry was not a director, officer, or employee of Fresh Market during any period relevant to this litigation. See Id. 6 Id. ¶ 2.
2 owned approximately 6% of Fresh Market stock prior to the transaction.7 For
clarity’s sake, because this Opinion decides the Berrys’ Motion to Dismiss only as
it concerns Ray Berry, when I refer to “Berry,” I am referring to Ray Berry.
Defendants Michael Casey, Jeffrey Naylor, Richard Noll, Bob Sasser, Robert
Shearer, Steven Tanger, Jane Thompson, and Michael Tucci (collectively, with
Richard Anicetti, the “Director Defendants”) were members of the Fresh Market
board of directors (the “Board”).8
Defendant Scott Duggan was Fresh Market’s Chief Legal Officer and Senior
Vice president – General Counsel. 9
Defendant Richard Anicetti, in addition to being a director on the Board, was
Fresh Market’s President and CEO.10
Defendant Cravath, Swaine & Moore LLP (“Cravath”) is a New York limited
liability partnership that served as Fresh Market’s legal counsel for the transaction.11
Defendant JPMorgan Chase & Co., is a Delaware corporation and parent to
Defendant J.P. Morgan Securities, LLC (“J.P. Morgan”), a Delaware limited liability
7 Id. 8 Id. ¶ 28. 9 Id. ¶ 29. 10 Id. ¶ 28. 11 Id. ¶ 30.
3 company. 12 J.P. Morgan served as Fresh Market’s financial advisor in the
transaction.13
A constellation of fifteen entities comprise the Apollo Defendants. For the
sake of this Opinion, which does not address their Motion to Dismiss, I refer to them
collectively as “Apollo.” Pomegranate Holdings, Inc. is a Delaware corporation and
parent company of Pomegranate Merger Sub, Inc., the company that merged with
and into Fresh Market in the transaction.14 Pomegranate Holdings, Inc. is controlled
by private-equity funds managed by Apollo Management VIII, L.P. (“Apollo
Management VIII”). 15 Four separate Apollo investment funds contributed to the
acquisition and retained an equity stake in Fresh Market following the transaction:
Apollo Investment Fund VIII, L.P., Apollo Overseas Partners (Delaware 892) VIII,
L.P., Apollo Overseas Partners (Delaware) VIII, L.P., and Apollo Overseas Partners
VIII, L.P. 16 The first three are Delaware limited partnerships, the last a Cayman
Islands limited partnership. 17 All the investment funds are managed by Apollo
Management VIII. 18 AIF VIII Management, LLC, a Delaware limited liability
12 Id. ¶¶ 30–31. 13 Id. ¶ 31. 14 Id. ¶ 33. 15 Id. 16 Id. ¶¶ 34–37. 17 Id. 18 Id. ¶ 3
4 company, is the general partner of Apollo Management VIII. 19 In turn, Apollo
Management, L.P., a Delaware limited partnership, is the sole member and manager
of AIF VIII Management, LLC. 20 Apollo Advisors VIII, L.P., a Delaware limited
partnership, serves as general partner of each of the investment funds. 21 Apollo
Management GP, LLC, a Delaware limited liability company, is the general partner
of Apollo Management, L.P. 22 Apollo Management Holdings, L.P., a Delaware
limited partnership, is the sole member and manager of Apollo Management GP,
LLC. 23 Apollo Management Holdings, GP, LLC, a Delaware limited liability
company, is the general partner of Apollo Management Holdings, L.P. 24 APO Corp.,
a Delaware corporation, is the intermediate holding company through which Apollo
Global Management, LLC holds its interests in various other Apollo entities. 25 AP
Professional Holdings, L.P., a Cayman Islands exempted limited partnership, allows
managing partners at Apollo to indirectly beneficially own a majority interest in each
Apollo entity. 26
19 Id. ¶ 41. 20 Id. ¶ 42. 21 Id. ¶ 39. 22 Id. ¶ 43. 23 Id. ¶ 44. 24 Id. ¶ 45. 25 Id. ¶ 46. 26 Id. ¶ 47.
5 Non-party Neuberger Berman (“Neuberger”) was a “significant institutional
stockholder” in Fresh Market. 27
Non-Party Jeff Ackerman served as Fresh Market’s Chief Financial Officer.28
B. Factual Background
1. Fresh Market Faces Stock Woes, and Berry Makes an Agreement with Apollo
In early January 2015, Fresh Market traded as high as $40.83 per share. 29 This
represented a 21.5% increase since the second half of 2014. 30 Then, on January 11,
2015, the Board terminated Fresh Market’s President and CEO, Craig Carlock,
without cause and without a permanent replacement lined up. 31 The Board did not
disclose details.32 The market reacted, and the stock price dropped 11% after a single
day of trading.33 During the eight-month search for a CEO that followed, the stock
price continued to fall, reaching a low of $18.70 in late August 2015.34 Internal
perspectives at the Company, however, evinced more optimism than did the market:
27 Id. ¶ 11. 28 Id. ¶ 91. 29 Id. ¶ 50. 30 Id. 31 Id. ¶ 51 (“the Board terminated then-CEO and President, Craig Carlock. The termination was without cause and no details were disclosed about the reason for his termination.”). 32 Id. 33 Id. 34 Id. ¶ 53.
6 Berry wrote that the Company had “a huge untapped future” and that the stock
volatility would end “once the market returns to rational evaluations of [The Fresh
Market].” 35 Discounted Cash Flow (“DCF”) valuations from this period, prepared
for the Board by management and J.P. Morgan in connection with a share repurchase
program, suggested a value range of $45.75 to $60.75 per share when the stock was
trading at just $32.59.36
It was in this atmosphere that Apollo’s Andrew Jhawar reached out to Berry
on July 3, 2015 to discuss taking the Company private.37 In an email to colleagues,
Jhawar described how he “pounced” on the opportunity to discuss a going-private
transaction with Berry, “given valuation and the apparent lack of love from Wall
Street and the analyst community.” 38 Apollo had recently taken another specialty
grocery retailer private, and according to Jhawar the flexibility and decision-making
offered by private ownership attracted Berry. 39 Berry and Jhawar exchanged several
messages setting a time to discuss the potential transaction.40 In contravention of
Fresh Market’s communication protocol, Berry did not disclose Apollo’s inquiries
35 Id. ¶ 52. 36 Id. ¶ 54. 37 Id. ¶¶ 55–56. 38 Id. ¶ 56. 39 Id. ¶ 57. Led by Jhawar, Apollo had recently taken Sprouts Farmers Markets private in a transaction with several features that made it similar to the transaction Apollo would propose for Fresh Market. Id. 40 Id. ¶¶ 58–60.
7 to either the interim-CEO or the lead director. 41 He claims to have relayed the
conversations to Duggan, though there is no documentation to show whether such
communication occurred.42
As the stock price reached its low point in August 2015, institutional
stockholder Neuberger requested the company take urgent action to end the
downward drift. 43 With Berry’s support, the Board hired a new CEO, Anicetti, on
September 1, 2015. 44 Following Anicetti’s hire, Berry contacted Jhawar to put him
in contact with his son, Brett Berry, so they could discuss an equity rollover of the
Berrys’ stock in connection with a going-private transaction.45 Berry wrote to
Jhawar that he had talked with both Brett Berry and Mike Barry and that after
contacting an attorney, “one of [them]” would contact Jhawar after they were certain
of their position. 46
Meanwhile, another private equity firm, CVC Capital, approached outside
director Steve Tanger, who relayed the inquiry to lead director Noll “as per
41 Id. ¶ 61–62. 42 Id. ¶ 62. Later in the SAC, the Plaintiff concludes that Duggan’s response to Berry’s disclosure of a different private equity suitor “does not suggest that Duggan was aware of Apollo’s approach to Ray Berry and Ray Berry’s active consideration of it.” Id. ¶ 74. 43 Id. ¶ 65. 44 Id. ¶ 66. 45 Id. ¶¶ 68–69. 46 Id. ¶ 69.
8 protocol.”47 Noll noted in correspondence that “the stock market [is] increasing our
valuation quickly now that [Anicetti] is in place,” and therefore an offer based on
the current valuation was “a non-starter.”48 Noll wrote, “My guess is that they’d
need to be in the range of 10-15x EBITDA to even get a real discussion going.”49
They shared this analysis with Berry. 50 On September 16, 2015, although he had
not yet shared Apollo’s interest, Berry disclosed to Anicetti and Duggan an inquiry
from Oak Hill Capital Management about a potential going-private transaction.51
Duggan suggested passing on the offer, given Anicetti’s recent transition into the
CEO role. 52 Shortly after, on September 25, Berry continued his discussions with
Apollo concerning a transaction; as proposed, the transaction would increase the
Berry family’s ownership from approximately 9.4% pre-deal to 28.3% post-deal.53
At that time, the Berrys orally agreed with Apollo to roll over their equity in the
47 Id. ¶ 70. 48 Id. 49 Id. As the SAC notes, this EBITDA range represents a per share value of approximately $45– $70. Id. 50 Id. ¶¶ 70–72. 51 Id. ¶ 74. 52 Id. Duggan suggested Berry inform Oak Hill Capital Management that “the Board just named our new CEO and he is working quickly to transition in and orient himself and let the Oak Hill guy know that you have noted his interest and end it at that.” Id. As the Plaintiff notes, this suggests that Duggan had no knowledge of Berry’s discussions with Apollo at this point. Id. 53 Id. ¶¶ 75–76. As noted above, the Plaintiff alleges the Berrys collectively owned 9.8% pre- transaction, but Apollo’s spreadsheet contemplated an increase from a 9.4% pre-transaction ownership. Compare id. ¶ 2 with id. ¶ 75. Per the SAC, the increase in equity ownership implied a profit of between $136 million and $930 million for the Berrys, collectively. Id.
9 event of a successful Apollo acquisition.54 Berry agreed to reach out to Duggan
regarding the next steps for Apollo to present its proposal to the Company. 55 Up to
this point, Berry had still not informed the Board about his discussions with Apollo.
2. Berry Discloses Apollo’s Interest, and the Stockholder Pressure Dials Up
On September 25, 2015, Berry told Duggan about Apollo’s acquisition
proposal.56 On September 28, when Duggan had not responded, Berry instructed
Jhawar to contact Duggan directly, which Jhawar did. 57 That same day, Duggan and
Noll held a conference with Neuberger in which Neuberger advocated for a
comprehensive strategic review of the Company, including a sale exploration.58 On
October 1, Apollo submitted its proposal to acquire Fresh Market at $30 per share.59
The acquisition’s proposed capital structure included an equity rollover with the
Berrys. 60 The proposal stated, “Apollo and the Berrys will be working together in
an exclusive partnership as it relates to a transaction with The Fresh Market.”61
54 Id. ¶ 76. 55 Id. 56 Id. ¶ 77. 57 Id. ¶¶ 77–78. The SAC notes that neither the subsequent board minutes nor the 14D-9 disclose that Berry initiated contact with the Company regarding Apollo’s proposal. Id. ¶ 78. 58 Id. ¶ 79. On October 8, Neuberger sent Berry a letter summarizing this conference. Id. ¶ 82. 59 Id. ¶ 80. 60 Id. 61 Id.
10 The Board called a special meeting on October 15 to discuss a response to
Apollo’s offer. 62 Cravath was represented at the meeting by Damien Zoubek, as
Fresh Market’s counsel. 63 In advance of the meeting, Duggan inquired about Berry’s
relationship with Apollo.64 According to the board minutes memorializing the
discussion, Berry told Duggan he had only conducted three conversations with
Apollo: (1) a general industry discussion; (2) a conversation about a potential
transaction in which Berry expressed willingness to sell his shares for cash or roll
over his equity, contingent in both cases upon the Board’s support; and (3) a courtesy
call prior to the October 1 proposal.65 Berry claimed in this discussion that he had
relayed each conversation to Duggan contemporaneously, and that he had relayed
one of the conversations to Noll. 66 Berry also told Duggan that he had no
involvement formulating Apollo’s proposal, had no commitment to or agreement
with Apollo, that he was not working with Apollo on an exclusive basis, and that he
62 Id. ¶ 83. 63 See id. ¶¶ 87–88. 64 Id. ¶ 83. 65 Id. ¶ 84. 66 Id. As the Plaintiff notes, Noll’s email regarding his speculation on what price would be necessary to get a discussion going suggests he was unaware of Berry’s relationship with Apollo and potential interest as a buyer. Id. ¶ 72.
11 was unaware of any contact between Apollo and Brett Berry. 67 Duggan presented
this information to the Board, and the Board did not inquire further.68
At that meeting, Cravath counsel Zoubek asked Berry if he would be willing
to participate in an equity rollover with an acquirer other than Apollo. 69 According
to the board minutes, while Berry maintained he had not committed to a transaction
with Apollo, he told the Board 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.” 70 Berry then absented himself from the
meeting, and the Board determined it would develop a strategic plan, including the
formation of a Strategic Transaction Committee (the “Committee”) consisting of
directors Naylor, Shearer, and Noll.71 The Board expressed concern over “continued
shareholder pressure,” and that the unsolicited acquisition proposals could become
public.72 After this meeting, Berry recused himself from all future board meetings
and waived his right to notice of the meetings.73
67 Id. ¶ 86. 68 Id. ¶ 87. 69 Id. ¶ 88. 70 Id. 71 Id. ¶ 89. 72 Id. 73 Id. ¶¶ 88-89; Transmittal Aff. of Matthew D. Perri in Support of the Ind. Dirs.’ Opening Br. in Support of their Mot. to Dismiss the Verified Sec. Am. Compl., D.I. 181–84 (“Perri Aff.”), Ex. D, Schedule 14D-9 (“14D-9”), at 18–19.
12 The day of the board meeting, Apollo sent a follow-up letter regarding its
“proposal (together with Ray and Brett Berry) to acquire” Fresh Market.74 The letter
stated that “Apollo (together with the Berry family rollover) is able and willing to
provide 100% of the equity commitment required in this potential transaction.”75
The letter set a deadline of October 20 for a response to the offer. 76 There was a
news leak the next day, and Reuters reported that Berry was searching for a private
equity partner to make an offer for Fresh Market, while Bloomberg reported that
Berry was working with Apollo to explore a buyout.77
3. The Board Puts the Company in Play
At an October 18 board meeting, the Board noted that the Reuters article
contradicted Berry’s representation that he had not partnered with Apollo. 78 At this
point, the Board decided to publicly announce the commencement of a review of
strategic and financial alternatives.79 It also determined that any sales process would
solicit multiple bids, rather than just Apollo’s. 80 It directed Duggan to inquire with
74 SAC, ¶ 92. 75 Id. 76 Id. 77 Id. ¶ 94. 78 Id. ¶ 95. 79 Id. ¶ 98. 80 Id.
13 Berry about the news article and his purported partnership with Apollo. 81 On
October 20, Noll wrote to Apollo, “In your letter, you state that Apollo will be
working together with the Berrys on an exclusive basis with respect to a potential
transaction. We have confirmed with Ray Berry that he has no such arrangement
with Apollo.”82 On October 21, Apollo withdrew its bid but continued to engage in
discussion with the Berrys regarding a potential acquisition.83
Over a month later, on November 25, in a letter to J.P. Morgan addressed to
the Board, Apollo formally renewed its acquisition offer “together with Ray and
Brett Berry” for $30 per share.84 That same day, Cravath spoke to Berry’s Counsel,
who promised to speak with Berry and “provide Cravath with a precise statement
about Ray Berry’s involvement with, and his views about, Apollo’s offer.”85 On
November 28, prompted by Cravath’s inquiries, Berry’s counsel sent an email to
Cravath—which Duggan shared in its entirety with the Board—detailing Berry’s
81 Id. 82 Id. ¶ 100. 83 Id. ¶ 101. In its withdrawal notice, Apollo once again noted the Berrys’ involvement, stating that it was withdrawing “Apollo’s proposal (together with Ray and Brett Berry).” Id. Other communications around this time (not shared with the Board) demonstrated Apollo’s ongoing relationship with the Berrys, including sharing and soliciting comments on draft financial models. Id. ¶¶ 99, 101. 84 Id. ¶ 102. 85 Id. ¶ 103.
14 history and relationship with Apollo (the “November Email”). 86 The November
Email read in pertinent part:
Since Apollo withdrew its earlier offer in October, Mr. Berry had one conversation with Apollo. During that conversation, he agreed, as he did in October, that, in the event Apollo agreed on a transaction with [Fresh Market], he would roll his equity interest over into the surviving entity. Apollo determined the price that was offered. Mr. Berry’s agreement with Apollo is oral. They have no written agreement.
More generally, Mr. Berry believes it is 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 premium as well as the complexity of implementing the changes Rick Anicetti covered in the earnings release while under the scrutiny of the public market.
Should Apollo not be successful in its bid, Mr. Berry would consider rolling his equity interest over in connection with an acquisition of [Fresh Market] by another buy-out firm that successfully bids for the 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 [Fresh Market]’s space with the acquisition of Sprouts. If The Fresh Market remains public, Mr. Berry will give serious consideration to selling his stock when permitted as he does not believe [Fresh Market] is well positioned to prosper as a public company and he can do better with his investment dollars elsewhere. 87
The Board met on December 1–2 and discussed Apollo’s offer, Berry’s
November Email, and concerns over investor pressure to sell.88 The Board noted a
concern “that investors would not give the Corporation the necessary time to
86 Id. ¶ 104; id. ¶ 110 (“Duggan read the November 28 Email in its entirety to the Board.”). 87 Id. ¶ 103–104. 88 Id. ¶ 110.
15 implement and see the results from the strategic plan.”89 The Board noted Apollo’s
offer was “interesting,” and it granted the Committee expanded authority to design
a sales process. 90 Also at these meetings, the Committee’s financial advisor, J.P.
Morgan, provided DCF analysis based on management’s projections that provided
a range of values from $34.50 to $44.00 per share.91
After this meeting, Berry confirmed at Fresh Market’s request, (1) a
willingness to discuss an equity rollover with a successful bidder other than Apollo
and (2) an agreement not to discuss an equity rollover with any party until authorized
to do so by Fresh Market. 92 After confirming, Berry told Anicetti the Board should
have immediately engaged in discussions with Apollo and that he was unsatisfied
with the timeline of the Board’s process.93
Apollo signed a confidentiality agreement on December 9, agreeing not to
“initiate or maintain contact” with any director at Fresh Market without the
Company’s express permission.94 On January 5, 2016, however, Jhawar wrote a
purported New Year’s greeting to Berry: “Hopefully, 2016 will be an exciting year
89 Id. ¶ 110. 90 Id. 91 Id. ¶ 112. 92 Id. ¶ 114. 93 Id. ¶ 121. Anicetti reported Berry’s comments to the Committee at a December 22 Committee meeting. Id. 94 Id. ¶¶ 119–20. Jhawar’s call lists and email records suggest he may have violated the agreement by communicating with the Berrys around this time. See id. ¶¶ 118, 120.
16 for all of us to do something together.”95 Berry responded on January 8: “We are
anticipating the possibility of an exciting 2016 with us participating together on a
mutually rewarding project.”96
4. The Board Conducts a Sale of the Company
a. The Board Institutes a Bidding Process
Over the course of the sales process, J.P. Morgan contacted thirty-two
potential bidders, twenty of whom signed confidentiality agreements and received
due diligence on Fresh Market, and the Committee met nineteen times. 97 On January
12, 2016, Fresh Market set a deadline of January 25 for potential suitors to submit
bids. 98 It represented to prospective bidders that Berry was open to discussing a
potential rollover when authorized to engage by the Company. 99 At least one
potential acquirer, Kroger, expressed strong interest in having discussions with
Berry, given the importance of a potential equity rollover, but the Board determined
that the no-contact rule would remain until it had determined to proceed with a
95 Id. ¶ 122. 96 Id. Duggan later represented to the Board at a January 21 meeting that Berry confirmed he had not spoken to any potential participant. Id. ¶ 125. In addition to the New Year’s greeting emails, an email from Jhawar’s assistant reminded him to call Brett Berry, and so additional contact between Apollo and the Berry family may have transpired. Id. ¶ 124. 97 14D-9, at 21–22. 98 SAC, ¶ 123. 99 Id.
17 transaction and established material terms. 100 Meanwhile, internal documents from
Apollo at this time show that it considered itself partnered exclusively with the
Berrys in the bid for Fresh Market. 101
On January 25, several parties submitted indications of interest. 102 Apollo’s
was at $31.25 per share.103 As the sale process continued, J.P. Morgan gave a
presentation to the Committee on February 25 and noted that Apollo continued to be
motivated about the transaction, while other suitors’ interest waned. 104 Ultimately,
Fresh Market accelerated the process for Apollo and permitted it to submit a bid on
March 8, ahead of the March 14 date communicated to other bidders. 105 Apollo
submitted a definitive proposal of $27.25 per share, four dollars less than its
100 Id. ¶¶ 126–27. 101 Id. ¶ 128 (Apollo was “[p]artnered exclusively with the founders”; “We are partnered together with . . . the Berry Family . . . who would roll $140 million of equity”; “we have maintained a strong relationship with the Berry family, who will roll over 4.5mm shares into the transaction”). 102 Id. ¶ 137. 103 Id. The SAC contains allegations that Apollo’s “client executive” at J.P. Morgan, Christian Oberle, fed inside information on the bid process to Apollo, even though he was not on the Fresh Market transaction team. See id. ¶¶ 130–36. According to the alleged facts, Oberle conveyed messages from Apollo to the team working on the Fresh Market transaction and advocated for Apollo, in the meantime providing Apollo with valuable insights in return. See id. ¶¶ 138–46. This inside information, according to the SAC, gave Apollo a distinct advantage, including being able to submit its bid earlier than other parties. Id. ¶ 146. The SAC does not allege that the Board, Duggan, Anicetti, or Berry knew about these communications. 104 Id. ¶ 142. According to the minutes, “KKR’s interest was waning . . . TPG’s interest was also waning . . . Sprouts had decided that they would not proceed . . . Kroger was concerned about its bandwidth. . . .” Id. 105 Id. ¶¶ 146–47.
18 indication of interest.106 Its bid was not contingent upon an equity rollover with the
Berrys. 107 No other suitor submitted a definitive bid.108
Before the Board made a decision, J.P. Morgan provided the Board with an
updated conflicts disclosure that discussed its business relationship with Apollo and
represented that the “senior deal team members” assigned to the Fresh Market sale
were not “currently providing services” to Apollo and were not “member[s] of the
coverage team” for Apollo.109
b. The Committee Requests Additional Financial Projections
From December 2015 through the end of the sales process in March 2016, the
Board reviewed several different financial projections. Originally, in December
2015, management provided the Board with a three-year financial model (the
“Management Projections”) that CFO Ackerman described as “pressure tested.”110
Ackerman noted at the December meetings that the Management Projections
106 Id. ¶ 147. 107 Id. ¶ 179. 108 Id. ¶ 147. 109 Id. ¶ 149. The conflict memorandum did not disclose J.P. Morgan employee Oberle’s communications with both the Fresh Market team and Apollo’s Jhawar. Id. Following the deal’s close, Oberle and Jhawar exchanged congratulations by email. Id. ¶¶ 149–50. 110 Id. ¶ 153. According to the SAC, it appears management had provided J.P. Morgan with “downward revised projections” in November, then, after it presented the Management Projections to the Board on December 1–2, it asked J.P. Morgan to “disregard the downward revised projection provided to you on November 18.” Id.
19 included a “15% overall risk adjustment . . . based on likelihood of achievability.”111
Documents incorporated by reference into the SAC suggest the Board nonetheless
perceived execution risks regarding these projections. 112 However, on February 2,
2016, with the sale process well underway, the Board approved management’s 2016
operating plan, which “tracked” the Management Projections.113 In addition, the
Board asked for stretch targets—higher projections—to motivate management
performance. 114
Duggan discouraged movement on the stretch targets. 115 On February 25, he
organized a meeting with the Committee and legal counsel to “walk through the type
of information that we should expect the Board will receive in the event an offer is
111 Id. ¶ 185. 112 See Perri Aff., Ex. L, Minutes of the Board of Directors Meeting dated December 1–2, 2015, at 18 (“[T]he Board was of the view . . . that there were significant risks on being able to successfully implement all of the initiatives and achieve the anticipated results. There was concern expressed that there was likely to be unexpected industry dynamics that could make achieving the forecasted results quite difficult, and the competitive pressure would continue or become more significant, further putting at risk the achievability of the forecasted results”); 14D-9, at 20 (“At the meeting, the Board discussed that if [Fresh Market] was not successful in executing on the new strategic plan, that could have a significant downward effect on [Fresh Market’s] valuation, and that there was significant risk in successfully executing the strategic plan, especially in light of the industry and competitive pressures [Fresh Market] was facing. [Fresh Market’s] management and J.P. Morgan also reviewed sensitivities to the [Management Projections] in the event that revenue or gross margin fell short of what was reflected in the [Management Projections].”). 113 SAC, ¶ 154. 114 Id. ¶¶ 155–57. Anicetti notified the Board that management would attempt to “tackle the question of stretch targets” by the March board meeting, and director Jane Thompson responded, “the stretch plan is still top of mind.” Id. ¶ 157. 115 Id. ¶ 160. On February 21, Duggan emailed Anicetti that he wanted “to avoid an email deliberation running on from [director Thompson’s] message.” He also emailed Committee member Naylor that day that he “wanted to chat regarding Jane’s emails.” Id.
20 presented or offers are presented.”116 After discussing the sale’s progress, the
February 25 meeting focused on the need for “additional scenario analyses . . . in
light of the Corporation’s recent business performance and the risks relating to the
Corporation’s ability to execute on its strategic plan, as well as the trends facing the
specialty food retail industry as a whole.” 117 The Committee purportedly based this
decision to request “additional financial projection scenarios” on “feedback that the
Corporation has received throughout the [sale] process from potential bidders that
there was a high degree of perceived execution risk inherent in the Corporation’s
strategic plan.” 118 The SAC alleges, however, that “JP Morgan gathered recurring
positive bidder feedback” and that any hesitancy was based on other factors. 119
Lead director Noll was not present at the February 25 meeting; afterward,
Duggan updated him by email but did not discuss the Committee’s request for
additional financial scenarios.120 On March 1, Duggan sent Noll a list of topics for
the March board meeting, again without including discussions of additional financial
116 Id. ¶¶ 159–61. 117 Id. ¶ 162. 118 Id. 119 Id. ¶ 164. 120 Id. ¶ 163. The emails relied upon in the SAC show that Noll was in London on Company business. See Transmittal Aff. of Daniyal M. Iqbal in Support of Def. Scott Duggan’s Reply Br. In Further Support of His Mot. to Dismiss the Verified Sec. Am. Compl., D.I. 223 (“Iqbal Aff.”), Ex. C, at 1 (Noll stated in email sent the day of meeting, “I’m in London meeting with investors.”).
21 scenarios. 121 He sent the other Committee members, Naylor and Shearer, an outline
for the upcoming board meeting that included a sensitivity analysis from J.P.
Morgan, and indicated that he would share “with the Committee as a whole” after
they reviewed it.122
That same day, CFO Ackerman advised J.P. Morgan that management “do[es]
not have an updated” long run strategic plan and “still plan[s] to execute against the
previously submitted” Management Projections.123 The next day, management
contacted J.P. Morgan to have a “sensitivity discussion.”124 On March 3, the
Committee met—again without Noll—to request that management and J.P. Morgan
“refine [sensitivities on the Management Projections] . . . and develop additional
financial projection scenarios so that the Board would have that perspective when it
met to determine how to respond to any bids that were received.” 125 On March 4,
the Committee requested that management “weigh in on the merit of things,” and
Anicetti indicated to Ackerman that management would provide an analysis of its
121 SAC, ¶ 165. 122 Id. ¶ 165; Iqbal Aff., Ex. F, at 1 (“Working with outside counsel, we put together an outline of a Board meeting at which a proposal is considered and that outline is attached . . . Once you take a look, I would plan on sharing with the Committee as a whole.”). 123 Id. ¶ 166. 124 Id. ¶ 167. 125 Id. ¶ 168.
22 projections. 126 On March 6, Naylor asked Duggan when J.P. Morgan would
complete the sensitivities, and Duggan said they would be done “after a proposal is
put forward.”127 Ultimately, management decided to postpone and review what J.P.
Morgan developed.128
On March 7—the day before Apollo’s bid submission—J.P. Morgan created
draft sensitivities for unit growth, gross margin, and revenue in response to the
Committee’s request. 129 The unit growth scenario was an upside case that
contemplated faster growth than the Management Projections. 130 J.P. Morgan
submitted these sensitivities to management on March 8, the day of Apollo’s bid.131
Later that day, in the afternoon, J.P. Morgan sent revised sensitivities that excluded
the upside unit growth scenario.132 In addition, it requested confirmation that
“sensitivities to the company projections are prepared by, or at the direction of, and
126 Id. ¶ 169 (“Anicetti further advised Ackerman that senior management was preparing to present a visual model illustrating the sales and EBITDA impact if [Management Projections were] achieved six months earlier than planned, or six, nine, or twelve months later than expected. Anicetti also prepared a draft of qualitative risks to the plan.”). 127 Id. ¶ 170. 128 Id. ¶ 171. 129 Id. ¶ 172. The SAC alleges the sensitivities were reviewed internally and adjusted downward prior to submission to Fresh Market. Id. 130 Id. ¶ 173. 131 Id. 132 Id. ¶ 174.
23 are approved by the management of [Fresh Market].” 133 Raj Vennam, a Fresh
Market finance executive, confirmed twenty-five minutes later.134
On the evening of March 8, J.P. Morgan submitted an additional scenario that
suggested lower values by combining the comparable growth and gross margin
scenarios. 135 J.P. Morgan revised and resubmitted the projection scenarios again that
same evening.136 Management confirmed within an hour of receipt.137 The SAC
charts the results of J.P. Morgan’s revisions over March 7 and 8: On March 7, the
three initial scenarios provided a range of share value spanning from $27.24 to
$40.12 per share; by the final version on the evening of March 8, the range was
$20.89 to $32.73 per share. 138 The March 8 Committee minutes stated,
“Management confirmed that it was preparing more fulsome forecast sensitivities
for J.P. Morgan to use in its valuation analyses.” 139
133 Id. 134 Id. 135 Id. ¶ 175–77. 136 Id. 137 Id. ¶ 176. 138 Id. ¶ 177. 139 Id. ¶ 178.
24 c. The Board Negotiates and Finalizes the Merger
On March 8, 2016, the Committee determined that Apollo’s bid was
insufficient. 140 In response, on March 9, Apollo submitted a “best and final” offer
of $28.50 per share, an increase of $1.25 per share over its previous offer.141 At this
point, the Committee decided to allow Apollo to engage in “chaperoned” discussions
with the Berry family, although the price remained confidential. 142 Berry wrote to
Jhawar and Brett Berry on March 9: “It is exciting that [The Fresh Market] has
decided to proceed with Apollo. It will be great to hear the full story once we are
cleared to talk. I am looking forward to working with you both to help [Fresh
Market] develop into a viable high growth and profitable retailer.” 143
On March 10, the Committee recommended to the Board that it accept
Apollo’s offer for $28.50 per share.144 At that board meeting, Anicetti and
Ackerman described the Management Projections as “an optimistic scenario if every
element of the plan went according to estimates,” and “more of an optimistic case at
this point,” which justified the lower financial scenarios.145 Preliminary results for
140 Id. ¶ 179. 141 Id. ¶ 180. 142 Id. 143 Id. ¶ 181. 144 Id. ¶ 182. 145 Id. ¶ 185. As noted above, the Management Projections included a 15% risk adjustment. Id.
25 first quarter 2016 showed that comparable store sales were in line with the
Management Projections, but new store sales had slightly underperformed. 146
Also at the March 10 meeting, J.P. Morgan presented valuation analysis on
the Management Projections as well as three downside scenarios. 147 Its downward
revisions were based on (1) an increase in the discount rate, (2) an increase in the
equity risk premium, and (3) a decrease in the terminal year EBITDA. 148
Communications at J.P. Morgan regarding the draft scenarios reveal some internal
skepticism. 149 Absent the downward revisions, J.P. Morgan’s DCF analysis of
Management Projections—including the increased discount rate and low implied
EBITDA multiple—implied a valuation range of $33.75 to $42.25 per share. 150
The Board met again on March 11 and approved the merger at $28.50 per
share. 151 Anicetti again stated the additional financial scenarios were necessary to
146 Id. 147 Id. ¶ 186. The downside scenarios were (1) underperforming sales, (2) worse-than-anticipated margins, and (3) worse-than-anticipates sales and margins. Id. 148 Id. ¶¶ 187–88. Specifically, J.P. Morgan increased its discount rate from an initial 8.5%-9.5% range to 9.0%-10.0%. Id. ¶ 187. It based this upward revision on a change in the betas of specialty retailers. Id. The higher impact change, however, came from the equity risk premium, which it increased 75 basis points, from a range of 6.0%-7.0% to 6.75%-7.75%. Id. This increase was in contrast to the supply-side equity risk premium, which decreased from 6.21% for 2015 to 6.03% for 2016. Id. As a result, the terminal year EBITDA multiple reduced from prior estimations of seven to nine times down to less than five. Id. ¶ 188. 149 See id. ¶ 189. J.P. Morgan Managing Director Ben Wallace reviewed drafts of the DCF analysis and opined that the beta range for the discount rate “isn’t justified” and that the terminal multiples “all seem low” based on the trading range. Id. 150 Id. ¶ 190. 151 Id. ¶ 191.
26 “provide dimension” on risks in the Management Projections. 152 Following the
merger’s close, Berry sent Duggan an email, which read in part, “Thanks for all of
your smart and caring work during this long drawn out process. We need to sit down
over a glass or two of wine and reminisce.” 153
According to the SAC, several members of Fresh Market management would
receive benefits related to the sale, irrespective of continued employment.154
Anicetti’s employment contract included single-trigger vesting of his equity awards
upon a change-in-control.155 He would receive $5,893,732 in single-trigger
severance compensation, as well as an additional $3,229,312 in double-trigger
severance compensation if he did not continue with Fresh Market under Apollo.156
Ackerman would receive $1,942,967 in single-trigger severance compensation, as
well as $1,706,403 in double-trigger severance. 157 Duggan would receive $1.2
million in single-trigger equity-based compensation, with an additional $1.1 million
in double-trigger compensation if terminated. 158
152 Id. ¶ 192. 153 Id. ¶ 194. 154 In its acquisition proposals, Apollo stated that it “look[ed] to partner with established and experienced executives,” and that “[i]ncentives are aligned between Apollo and our management team partners.” Id. ¶ 184. The SAC notes that Apollo compensates management through performance options that vest if Apollo realizes certain multiples of invested capital. Id. 155 SAC, ¶ 67. 156 Id. ¶ 183. 157 Id. 158 Id. ¶ 10.
27 Fresh Market announced the acquisition, including the Berrys’ equity
rollover, on March 14. 159 At $28.50 per share, the aggregate purchase price was
$1.36 billion.160 The merger agreement also provided for a twenty-one-day “go-
shop” period.161 Apollo possessed matching rights on any offer as well as a $34
million termination fee if Fresh Market terminated its purchase in favor of a superior
offer, representing approximately 2.5% of the purchase price.162 No alternative
bidder emerged. 163 Bloomberg published an article that day noting the advantages
the Berrys and Apollo each provided for the other and speculating that these
advantaged led to an “edge” for Apollo in the acquisition.164
5. Fresh Market Files its 14D-9
On March 25, Fresh Market publicly filed its Schedule 14D-9 (the “14D-9”),
and Apollo publicly filed its Schedule TO. 165 Duggan drafted the 14D-9 with
Cravath, and the Director Defendants approved.166 The 14D-9 omitted the following
facts:
159 Id. ¶ 195. 160 Id. 161 Id. ¶ 197. 162 See id. ¶¶ 195, 197 ($34 million termination fee equals 2.5% of aggregate $1.36 billion purchase price). 163 Id. 164 Id. ¶ 196. 165 Id. ¶ 198. The 14D-9 incorporated the schedule TO by reference. Id. ¶ 199. 166 Id. ¶ 199.
28 • Jhawar’s July 3, 2015 proposal to Berry that he join Apollo in a buyout
through an equity rollover;167
• Berry’s September 25, 2015 oral agreement with Apollo to roll over his equity
in the event of an Apollo acquisition; 168
• Apollo’s representations that it had partnered exclusively with the Berrys; 169
• The fact that Berry’s statements denying an agreement with Apollo were
contradicted by his November Email; 170
• Berry’s first communication to the Board regarding Apollo’s unique attributes
and his preference for Apollo as a partner;171
• Berry’s second communication to the Board on October 15 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;”172
• Neuberger’s requests for a strategic review and exploration of sale and the
Board’s acknowledgement of existing shareholder pressure;173
167 Id. ¶ 205. 168 Id. 169 Id. 170 Id. ¶ 206. 171 Id. ¶ 207. 172 Id. 173 Id. ¶ 208.
29 • Berry’s communication in the November Email that he would consider selling
his shares if Fresh Market remained public; 174
• Berry and Jhawar’s “New Year’s” emails; 175
• the fifteen percent risk adjustment built into the Management Projections;176
• J.P. Morgan’s creation of additional downside scenarios after Fresh Market’s
receipt of Apollo’s offer; and 177
• The truth that J.P. Morgan, not management, provided the additional financial
scenarios. 178
In addition, the SAC alleges the Schedule TO contains material omissions because
it does not disclose Apollo’s initial call to Berry, Berry’s oral agreement, or the
“New Year’s” greetings between Berry and Apollo. 179
C. Procedural History
Plaintiff Elizabeth Morrison filed her original Complaint on October 6, 2016
for breach of fiduciary duty against the Director Defendants, Ray Berry, and
Anicetti, and aiding and abetting against Brett Berry. 180 All defendants moved to
174 Id. 175 Id. ¶ 209. 176 Id. ¶ 211. 177 Id. ¶ 212. 178 Id. 179 Id. ¶¶ 205, 209–210. 180 Compl., D.I. 1.
30 dismiss. 181 I granted the motions to dismiss in a Letter Opinion on September 28,
2017, finding that the majority vote of disinterested stockholders cleansed any
breaches of duty. 182
The Plaintiff appealed that decision, and the Supreme Court reversed and
remanded, finding that the Defendants failed to show the stockholder vote was fully
informed, and thus the business judgment rule did not apply under Corwin. 183 The
Plaintiff amended her complaint on March 7, 2019, adding a claim for breach of
fiduciary duty against Duggan and claims for aiding and abetting against J.P.
Morgan, Apollo, and Cravath. 184 All Defendants moved to dismiss on May 1. 185 I
granted the Plaintiff leave to amend her complaint a second time, and she did so on
June 3. 186 All Defendants moved to dismiss the SAC on July 12.187
I heard oral argument on all seven motions to dismiss on September 23, 2019
and considered the matter fully submitted at that time. As noted previously, my
decision here concerns only those defendants with fiduciary duties—the Director
181 D.I. 12, 14, 15. 182 Morrison v. Berry, 2017 WL 4317252 (Del. Ch. Sept. 28, 2017), rev'd, 191 A.3d 268 (Del. 2018), as rev’d (July 27, 2018). 183 Morrison v. Berry, 191 A.3d 268, 275 (Del. 2018), as rev’d (July 27, 2018). 184 Verified Am. Compl., D.I. 88. 185 D.I. 139–49. 186 SAC. 187 D.I. 187–96.
31 Defendants, Berry, Duggan, and Anicetti. I reserve decision on the aiding and
abetting claims against Apollo, J.P. Morgan, Cravath, and Brett Berry, which may
be to some extent determined by my decision here.
II. ANALYSIS
All Defendants have moved to dismiss this action under Chancery Court Rule
12(b)(6).188 In considering such a motion,
(i) all well-pleaded factual allegations are accepted as true; (ii) even vague allegations are well-pleaded if they give the opposing party notice of the claim; (iii) the Court must draw all reasonable inferences in favor of the nonmoving party; and (iv) dismissal is inappropriate unless the plaintiff would not be entitled to recover under any reasonably conceivable set of circumstances susceptible of proof.189
However, I do not need to accept “conclusory allegations unsupported by specific
fact” as true, nor must I “draw unreasonable inferences” in the Plaintiff’s favor.190
Additionally, if allegations or documents “incorporated into the complaint
effectively negate the claim as a matter of law,” then I may dismiss the claim. 191
188 Defendant Brett Berry has also moved to dismiss for lack of personal jurisdiction under Chancery Court Rule 12(b)(2). 189 Savor, Inc. v. FMR Corp., 812 A.2d 894, 896–97 (Del. 2002) (footnotes and internal quotations omitted). 190 Thermopylae Capital Partners, L.P. v. Simbol, Inc., 2016 WL 368170, at *9 (Del. Ch. Jan. 29, 2016) (quoting Price v. E.I. duPont de Nemours & Co., Inc., 26 A.3d 162, 166 (Del. 2011)). 191 Malpiede v. Townson, 780 A.2d 1075, 1083 (Del. 2001).
32 A. The Plaintiff Fails to State a Non-Exculpated Claim for Breach of Fiduciary Duty against the Director Defendants
The Director Defendants benefit from an exculpatory provision under 8 Del
C. § 102(b)(7) that protects them from liability for violations of their duty of care.192
Therefore, to survive the Motion to Dismiss in this post-closing damages action, the
Plaintiff must plead a non-exculpated claim, which requires sufficiently alleging the
Director Defendants were either self-interested, lacked independence, or acted in
bad faith.193 Although Revlon applies to the underlying company sale process—and
is thus a context-specific lens through which to look at the defendants’ duties—this
does not change the requirement that the Plaintiff plead a non-exculpated claim. 194
192 Perri Aff., Ex. A, Certificate of Incorporation of Fresh Market, Inc., at 5. 193 In re Cornerstone Therapeutics Inc, Stockholder Litig., 115 A.3d 1173, 1175–76 (Del. 2015) (“A plaintiff seeking only monetary damages must plead non-exculpated claims against a director who is protected by an exculpatory charter provision to survive a motion to dismiss, regardless of the underlying standard of review for the board’s conduct—be it Revlon, Unocal, the entire fairness standard, or the business judgment rule . . . even if a plaintiff has pled facts that, if true, would require the transaction to be subject to the entire fairness standard of review, and the interested parties to face a claim for breach of their duty of loyalty, the independent directors do not automatically have to remain defendants.”); In re Essendant, Inc. S’holder Litig., C.A. No. 2018-1789-JRS, Mem. Op., at 19 (Del. Ch. Dec. 30, 2019) (“given [defendant’s] exculpatory charter provision, in order to survive the . . . Board’s Motion to Dismiss, the Complaint must state valid, non-exculpated claims.”); Nguyen v. Barrett, 2016 WL 5404095, at *3 (Del. Ch. Sept. 28, 2016) (“[W]hen asserting a . . . claim for damages against directors post-close, a plaintiff must allege facts making it reasonably conceivable that there has been a non-exculpated breach of fiduciary duty by the board. . .” (citing Chen v. Howard, 87 A.3d 648, 691 (Del. Ch. 2014))). 194 Kahn v. Stern, 183 A.3d 715, at *1 n.3 (Del. 2018) (TABLE) (“The presence of an exculpatory charter provision does not mean that Revlon duties no longer apply. Rather, Revlon remains applicable as a context-specific articulation of the directors’ duties but directors may only be held liable for a non-exculpated breach of their Revlon duties.”).
33 To state a claim, then, the Plaintiff must plead a breach of loyalty; that the
Director Defendants were interested in the transaction, lacked independence, or
acted in bad faith. The Plaintiff can show the Director Defendants lacked
independence in several ways: “A director is considered interested where he or she
will receive a personal financial benefit from a transaction that is not equally shared
by the stockholders.”195 Or, “[a] director lacks independence if . . . her judgment is
controlled by another director or driven by extraneous considerations.”196
Alternatively, to state a claim for bad faith conduct, the Plaintiff must allege the
Director Defendants “knowingly and completely failed to undertake their
responsibilities.” 197 The Plaintiff can do this by showing that
the fiduciary intentionally acts with a purpose other than that of advancing the best interests of the corporation, the fiduciary acts with the intent to violate applicable positive law, or the fiduciary intentionally fails to act in the face of a known duty to act, demonstrating a conscious disregard for his duties. 198
The common factor in these descriptions of bad faith is that “the directors acted with
scienter, meaning they had actual or constructive knowledge that their conduct was
195 In re Novell, Inc. S’holder Litig., 2013 WL 322560, at *7 (Del. Ch. Jan. 3, 2013) (quoting Rales v. Blasband, 634 A.2d 927, 936 (Del. 1993)). 196 Id. (citing Aronson v. Lewis, 473 A.2d 805, 816 (Del. 1984)). 197 Lyondell Chem, 970 A.2d at 243–44. 198 In re Walt Disney Co. Derivative Litig., 906 A.2d 27, 67 (Del. 2006) (emphasis added).
34 legally improper.”199 Thus, “[e]ven gross negligence, without more, does not
constitute bad faith.”200
Because I find the facts, as alleged, do not state a claim that the Director
Defendants were interested, lacked independence, or acted in bad faith, I grant their
Motion to Dismiss.
1. The Plaintiff does not Adequately Plead the Director Defendants were Self-Interested or Lacked Independence
The Plaintiff fails to plead that the Director Defendants lacked independence.
Instead, she makes a novel argument to support the familiar claim that these
defendants were self-interested in the transaction, and held pecuniary interests not
shared with the stockholders. The Plaintiff alleges activist shareholder pressure
improperly motivated the Director Defendants to act with self-interest, in
consideration of those directors’ reputations. The Plaintiff argues, “[t]he best way
to understand the rationale for the sale process is that its true purpose was to alleviate
pressure on the incumbent directors.” 201 Essentially, the Plaintiff argues that faced
with activist pressure and the specter of a proxy contest, the Director Defendants
199 City of Birmingham Ret. & Relief Sys. v. Good, 177 A.3d 47, 55 (Del. 2017) (internal quotation marks and citation omitted). 200 In re Paramount Gold & Silver Corp. S’holders Litig., 2017 WL 1372659, at *14 (Del. Ch. Apr. 13, 2017) (quoting In re Crimson Expl. Inc. S’holder Litig., 2014 WL 5449419, at *23 (Del. Ch. Oct. 24, 2014)). 201 Pl.’s Ans. Br. In Opp’n. to the Sell-Side Defs.’ Mots. to Dismiss, D.I. 218 (“Pl. Sell-Side Br.”), at 48.
35 decided to eliminate their personal and professional problems by pretending to
auction the Company but in reality handing it to Apollo in a short-term, unfairly
cheap sale.
In support, the Plaintiff offers several allegations. First, the Board was facing
increasing activist pressure. At the conference on September 28, Neuberger was
already urging the Board to conduct a comprehensive strategic review, which
included a sale assessment. 202 At its October 15 meeting, the Board noted Fresh
Market “could be the subject of continued shareholder pressure, continued
shareholder communications and, potentially, more unsolicited acquisition
proposals. . .” 203 To compound the issue, on November 28, 2015, Berry’s counsel
told Cravath that Berry “believes it is in the best interests of the shareholders for the
board to pursue a sale of the company,” and that in the absence of a sale, Berry would
consider divesting his substantial minority interest in the Company on the open
market.204 Thus, the Plaintiff concludes, unless they sold the Company, activist
pressure combined with Berry’s open-market sale could drive the stock price down,
inciting a proxy contest and compounding the damage already done to the directors’
reputations by their firing and testudinal effort to replace the previous CEO.
202 See SAC, ¶¶ 79, 82. 203 Id. ¶ 89. 204 Id. ¶ 104.
36 Accepting the alleged facts as true, I can conclude the Director Defendants
faced mounting activist pressure and were concerned about their reputations, as any
director would be under such pressure. I cannot reasonably infer, however, that this
activist pressure implies they acted for improper motives. I note that because of
Fresh Market’s staggered board, only directors Naylor, Thompson, and Berry would
stand for election at the next annual meeting in the spring of 2016.205 As this Court
has previously found:
[T]here is no logical force to the suggestion that otherwise independent, disinterested directors of a corporation would act disloyally or in bad faith and agree to a sale of their company ‘on the cheap’ merely because they perceived some dissatisfaction with their performance among the stockholders or because of the possibility that a third of their number might face opposition for reelection at the next annual stockholders meeting. 206
The Plaintiff contends that “[i]nitiating a sham sale process with an expected
winning bidder—Apollo and the Berrys—would placate Ray Berry and eliminate
the directors’ reputational risk, so long as any resulting stockholder complaint did
not survive judicial scrutiny under the new pleading requirement of Corwin v. KKR
205 Perri Aff. Ex. C, Schedule 14A, Notice of Annual Meeting and Proxy Statement (“Proxy”), at 7. 206 In re Lukens Inc. S’holders Litig., 757 A.2d 720, 729 (Del. Ch. 1999), aff’d sub nom. Walker v. Lukens, Inc., 757 A.2d 1278 (Del. 2000). The staggered Board in this case means a third of directors (including Berry) would be up for reelection at the 2016 annual meeting. See Proxy, at 7. I note that, unlike here, in Lukens, the Court went on to note the directors decided to sell before receiving the stockholder proposals that exerted the activist pressure, and the Court determined this sequence of events confirmed the lack of “logical force” behind the plaintiff’s allegation. Id. In other words, the Court in Lukens found the argument both legally and factually unsupportable. Id.
37 Fin. Hldgs. LLC.”207 But this asks me to infer that the Director Defendants, for the
purpose of protecting their reputations as fiduciaries, breached their fiduciary duties,
risking the far greater blackening of their fiduciary reputations, in the hope that the
Corwin pleading standard would hide their misdeeds, at the same time (per the SAC)
sowing material omissions in the disclosures, thereby eliminating Corwin’s
protections. I cannot draw this unreasonable inference.
Nor does the Plaintiff allege facts indicating that a proxy fight was on its way.
No stockholder—Berry, Neuberger, or anyone else—initiated a proxy fight or
threatened one. The effects of an open-market sale by Berry, whether a stock
collapse or a resultant proxy contest, remain speculative. Finally, if the Director
Defendants had an interest in consummation of a sale, there is no reason they needed
to run a sham auction process, as the Plaintiff alleges they did. The idea that the
Director Defendants, a majority of whom were insulated from removal in the short
term, would nonetheless breach their fiduciary duties and harm their own pecuniary
interests as stockholders by orchestrating a sham auction for the purpose of avoiding
speculative reputational risk is not credible.
207 Pl. Sell-Side Br., at 49–50.
38 2. The Plaintiff Does Not Plead Facts from which I may infer that the Director Defendants Acted in Bad Faith
The Plaintiff can also plead a claim for a breach of the duty of loyalty if she
alleges facts giving rise to a reasonable inference of bad faith.208 A demonstration
of bad faith requires acts or omissions taken against the interest of the Company,
with scienter. The Plaintiff alleges misconduct relating to each part of the
transaction, and so I examine the allegations essentially in chronological order.
a. Initiation of the Sales Process
The Plaintiff focuses first on the Director Defendants’ decision in December
2015 to initiate a sale of the Company. The alleged facts show that by the time the
Board initiated the sale, it had an accurate picture of the landscape. The Board knew
that Berry and Apollo had an agreement for an equity rollover should Apollo succeed
in its bid.209 It knew that Berry’s strong preference for Apollo made an equity
rollover with another buyer unlikely. 210 The Board also knew that Berry had made
misrepresentations by initially downplaying his involvement with Apollo.211 In sum,
208 See Kahn v. Stern, 183 A.3d 715, at *1 (Del. 2018) (TABLE) (requiring plaintiff to “plead[] facts that support a rational inference of bad faith” rather than requiring plaintiff to “plead facts that rule out any possibility other than bad faith” (citing Brinckerhoff v. Enbridge Energy Co., Inc., 159 A.3d 242, 258–60 (Del. 2017), rev’d (Mar. 28, 2017))). 209 SAC, ¶ 104. 210 Id. ¶ 88 (Berry was “not aware of any other potential private equity buyer . . . with whom he would be comfortable engaging in an equity rollover”); id. ¶ 104 (“[Berry] believes that Apollo is uniquely qualified to generate value because of its recent success in [Fresh Market’s] space. . .”). 211 Compare id. ¶ 86 (Berry represented he “had no arrangement or agreement with Apollo”) with id. ¶ 104 (“[Berry] agreed, as he did in October, that, in the event Apollo agreed on a transaction 39 the Director Defendants were fully aware of Apollo’s advantage in any prospective
sale process. The alleged facts, however, do not support an inference that the sale’s
outcome was a foregone conclusion, or—more importantly—was intentionally
structured to forgo value available to the stockholders. Even if Berry’s strongly-
worded preference for Apollo made another equity rollover deal unlikely, he
confirmed to the Board three separate times—including after his disclosure of an
agreement with Apollo in the November Email—that he did not have an exclusive
agreement with Apollo and that he would consider another partner under the right
conditions. 212 Drawing all reasonable inferences for the non-moving party, as I must
at this stage, I can infer that the Director Defendants knew the possibility of Berry’s
agreeing to a non-Apollo partnership was slim, if not impossible.
Armed with this information, the Director Defendants faced a difficult
situation. Major stockholders Neuberger and Berry were both urging a sale of the
Company or, at the very least, a sale exploration. 213 Berry’s involvement with
Apollo had leaked to Reuters and Bloomberg, making the Company’s situation
with [Fresh Market], he would roll his equity interest over into the surviving entity . . . Mr. Berry’s agreement with Apollo is oral.”). 212 Berry represented to the Board ahead of the October 15 meeting that he “was not working with Apollo on an exclusive basis.” Id. ¶ 86. Noll later wrote to Apollo that Berry confirmed the lack of exclusivity. Id. ¶ 100. Before the initiation of the sale, the Board, through Cravath, confirmed with Berry a final time that he was “willing to discuss an equity rollover with any potentially interested party that the Board selected as a winning bidder.” Id. ¶ 114. 213 See id. ¶¶ 79, 104.
40 public.214 As a result, by the time the Board decided to sell, Fresh Market was
already in the midst of conducting a public strategic review. 215 As the Plaintiff notes,
this put the Director Defendants’ in straightened circumstances.
As noted above, Revlon can provide a contextual inquiry about whether the
Director Defendants’ choices were “reasonable under the circumstances as a good
faith attempt to secure the highest value reasonably attainable,”216 but the Plaintiff
is still obligated to plead a non-exculpable claim. In this context, such a pleading
requires the Plaintiff to show that it is reasonably conceivable that the Director
Defendants knowingly chose to ignore their duty once a sale process was
commenced; to maximize stockholder value. 217
The Plaintiff suggests that two alternatives existed to the Director Defendants’
choice: they could have said “no” to Apollo and sued Berry, or they could have
leveraged exclusivity with Apollo for a higher price range.218 But Delaware law is
clear that there is no blueprint to fulfill fiduciary duties in the company-sale
214 Id. ¶ 94. 215 See id. ¶ 98. 216 See RBC Capital Markets, LLC v. Jervis, 129 A.3d 816, 849 (Del. 2015) (quoting C & J Energy Servs., Inc. v. City of Miami Gen. Emps.’ & Sanitation Emps.’ Ret. Trust, 107 A.3d 1049, 1066 (Del. 2014)). 217 Chester Cty. Employees’ Ret. Fund v. KCG Holdings, Inc., 2019 WL 2564093, at *17 (Del. Ch. June 21, 2019). 218 Pl. Sell-Side Br., at 17.
41 situation.219 More to the point, the Plaintiff must plead facts from which I may
reasonably infer that the Director Defendants were aware of these alternatives,
understood that they would maximize value, but nonetheless chose instead to act
against the interests of the Company and its stockholders. To the extent the Plaintiff
contends that good faith in this context required a standstill of any sales process, I
reject that conclusion. As to the suggestion that the Director Defendants could have
traded exclusivity with Apollo for a higher price range, it is true that this was an
option. Instead, they chose to institute an auction and solicit multiple bids. Doing
so, the Plaintiff argues, meant they “indulged . . . fictions” about Berry’s openness
to equity partners other than Apollo, and about their ability to solicit bids. 220 It is
conceivable that this was unwise. But the alleged facts do not reasonably support
the conclusion that the Director Defendants “knowingly and completely failed to
undertake their responsibilities” by instituting an auction and soliciting bids from a
wide field of suitors, rather than opting for a different potential value-enhancing
219 See Wayne Cty. Employees’ Ret. Sys. v. Corti, 2009 WL 2219260, at *11 (Del. Ch. July 24, 2009), aff’d, 996 A.2d 795 (Del. 2010) (“Again, there is no ‘blueprint’ that directors must follow to satisfy their fiduciary obligations in a change of control transaction. Rather, what a director must do to discharge her fiduciary obligations depends on the circumstances in which the director is acting.”); In re Novell, Inc. S’holder Litig., 2013 WL 322560, at *7 (Del. Ch. Jan. 3, 2013) (“There is no single path that a board must follow in order to maximize stockholder value, but directors must follow a path of reasonableness which leads toward that end.” (quoting In re Smurfit–Stone Container Corp. S’holder Litig., 2011 WL 2028076, at *10 (Del. Ch. May 20, 2011), rev’d May 24, 2011 (footnote omitted))). 220 Pl. Sell-Side Br., at 17.
42 choice. 221 In a difficult situation, where the sale of the Company was likely, and the
likely winner was Apollo, the Director Defendants made a decision to maximize
value through an auction process. During the process, Apollo increased its offer. I
cannot reasonably infer, based on the alleged facts, that the Director Defendants’
decision to run an auction was in bad faith.
b. Structure and Oversight of the Sales Process
The Plaintiff also alleges the Director Defendants exhibited bad faith in their
structuring and oversight of the sales process. As with a decision to sell, constructing
a process requires reasonable good faith effort, and “[t]here is no single path that a
board must follow. . .” 222 According to the Plaintiff, the best evidence of a bad faith
process was the choice to refuse potential bidders an opportunity to communicate
with the Berrys. 223 The Director Defendants extracted a promise from Berry not to
discuss an equity rollover with any party, until authorized by the Board.224 Even
when at least one party expressed interest in communicating with Berry, the Board
refused to lift the no-communication policy until it selected a winning proposal and
221 See Lyondell Chem. Co. v. Ryan, 970 A.2d 235, 243–44 (Del. 2009) (“[I]f the directors failed to do all that they should have under the circumstances, they breached their duty of care. Only if they knowingly and completely failed to undertake their responsibilities would they breach their duty of loyalty.”). 222 Novell, 2013 WL 322560, at *7 (quoting Smurfit–Stone, 2011 WL 2028076, at *10 (footnote omitted)). 223 Pl. Sell-Side Br., 46–47. 224 SAC, ¶ 114.
43 established material terms. 225 This is evidence, the Plaintiff argues, that the Director
Defendants “did not trust Ray Berry not to discourage competing bids.”226
Even accepting the Plaintiff’s conclusion here as true, the Director
Defendants’ decision appears rational, rather than in bad faith. The point of the
auction process was to encourage, not discourage, competing bids. The Director
Defendants knew Berry held, at this point, a strong preference for Apollo. Thus,
they could guess that communications with Berry might discourage competing bids,
as the Plaintiff suggests. Logically, preventing Berry from discouraging these bids
would keep the field as neutral as possible and drive the price up, not down. A
reasonable conclusion from this is that the no-communications policy was a
reasonable decision for structuring the auction process if the Director Defendants
sought to neutralize Apollo’s advantage and stimulate competition. In any event, the
facts pled, if true, do not imply bad faith.
The Plaintiff suggests that best practice would have been to permit Berry to
communicate with potential bidders. Perhaps so. Another view, expressed by the
Director Defendants, is that such a course would effectively have handed the reigns
of the auction process to Berry, when the Board’s goal was to separate him from the
225 Id. ¶¶ 126–27. 226 Pl. Sell-Side Br., 47.
44 process to avoid his influence.227 If Berry were allowed open communication with
bidders and expressed or implied his preference to work only with Apollo, the effect
could have been a swift elimination of anyone but Apollo from the bidding field.
The Plaintiff’s inference—that the Director Defendants sequestered Berry for the
purpose of hiding their sham process from the light of due diligence—is not
reasonable in light of the Board’s recognition that Berry had a favorite in the auction
process and the need to neutralize that influence. In other words, faced with
competing scenarios, either of which could have negative consequences to the sale
price, the Board, as it was required to do, chose one. Nothing in this implies bad
faith.
I also do not find bad faith regarding the Director Defendants’ oversight of
J.P. Morgan. The Plaintiff contends the Directors Defendants ought to have seen
past an “artfully drafted conflict disclosure memorandum” because it “should have
raised suspicion.”228 J.P. Morgan’s conflicts memorandum stated that the “senior
deal team members” working for Fresh Market were not “currently providing
services” for “member[s] of the coverage team” for Apollo.229 According to the
227 The Plaintiff cites to case law exploring the notion that a buyer’s ability to see an insider’s body language is important information, and that best practice is chaperoned, insider cooperation with interested bidders. These cases do not involve the particular situation Fresh Market’s Board faced; needing to stimulate competition by screening a non-neutral insider who might otherwise stymie it. In any event, failure to apply best practices does not imply bad faith. 228 Pl. Sell-Side Br., at 55. 229 SAC, ¶ 149.
45 Plaintiff, the Director Defendants ought to have possessed the acumen to probe
further and ask if any of J.P. Morgan’s Apollo coverage team were working behind
the scenes to provide services to Apollo in connection with Fresh Market. Failure
to look past the conflicts disclosure memorandum may have been careless, but the
pleading standard here is the reasonable implication of scienter, not negligence or
even gross negligence. I do not find that relying on J.P. Morgan’s memorandum is
an intentional dereliction of duty. 230 Similarly, to the extent the Plaintiff alleges the
Director Defendants acted in bad faith by hiring advisors on a contingent fee
structure, I find nothing in these circumstances sufficient to overcome the general
rubric of Delaware law that such arrangements are routine and do not imply bad
faith.231
The Plaintiff also contends that the facts surrounding the creation of financial
scenarios at the auction’s tail end, which enabled a fairness opinion, demonstrates
the Director Defendants’ bad faith. The financial scenarios suggest to the Plaintiff
230 I note that the standard for aiding and abetting a breach of fiduciary duty involves a different standard, and nothing herein necessarily absolves J.P. Morgan of liability. For reasons noted below, I reserve decision on the non-fiduciary causes of action. 231 See In re Alloy, Inc. S’holder Litig., 2011 WL 4863716, at *11 (Del. Ch. Oct. 13, 2011) (“[W]hile stockholders may have sufficient concerns about contingent fee arrangements to warrant disclosure of such arrangements, that need to disclose does not imply that contingent fees necessarily produce specious fairness opinions.”). Delaware case law generally recognizes the efficiency and mundanity of the contingent fee structure. See In re Atheros Commc’ns., Inc. S’holder Litig., 2011 WL 864928, at *8 (Del. Ch. Mar. 4, 2011) (“Contingent fees are undoubtedly routine. . .”). The Plaintiff cites several cases for the proposition that a contingent fee may misalign the advisor’s interests, but these cases are applicable to the aiding and abetting claims, not to the fiduciary claims at issue in this Opinion.
46 a “conspiracy to deflate the numbers” executed by Duggan and Cravath in
coordination with Director Defendants Naylor and Shearer that kept lead director
Noll in the dark while allowing J.P. Morgan to present the Board with downward
sensitivity analyses. 232 The SAC, however, does not allege that the Director
Defendants, including the Committee, had more than limited involvement with the
financial scenarios.
According to the SAC, the Committee met three times in the weeks leading
up to Apollo’s bid. Duggan organized a meeting on February 25, 2016, at which the
Committee determined it would “request that the Corporation’s management
develop additional financial projection scenarios to reflect updated assumptions. .
.” 233 At the next meeting on March 3, the Committee “reiterated its prior request
that management and JP Morgan” refine sensitivities “so that the Board would have
that perspective when it met to determine how to respond to any bids that were
received.”234 Finally, the Committee met a third time on March 8—the day of
Apollo’s bid. 235 The minutes for that meeting state, “Management confirmed that it
232 See Pl. Sell-Side Br., at 59–60. 233 SAC, ¶ 162. 234 Id. ¶ 168. 235 Id. ¶ 178.
47 was preparing more fulsome 236 forecast sensitivities for J.P. Morgan to use in its
valuation analyses.”237
The Plaintiff identifies three things in connection with this series of meetings
over the financial scenarios from which she infers bad faith. First, the Plaintiff points
out that Noll did not attend the first two of these three meetings. Correspondence
referenced by the SAC, however, shows that Noll was in London on business for the
Company and that he was included on the emails setting up the meetings. 238 Nothing
about the timing—necessitated by the sales process itself—implies bad faith on the
part of the Committee members. Second, the Plaintiff notes that Duggan’s post-
meeting outline sent to Naylor and Shearer differed from the one sent to Noll. 239 The
referenced correspondence shows that Duggan sent the material regarding financial
scenarios to Naylor and Shearer for review, after which he would provide it to
Noll. 240 Again, nothing about this sequence implicates a Committee member’s bad
faith. Third, the Plaintiff points out that the board minutes for the March 8 meeting
falsely report that management developed sensitivities for J.P. Morgan, when in fact
236 See Jeter v. RevolutionWear, Inc., 2016 WL 3947951, at *9 n.90 (Del. Ch. July 19, 2016). 237 SAC, ¶ 178. 238 Iqbal Aff., Ex. C, at 1 (Noll stated in email sent the day of meeting, “I’m in London meeting with investors.”). 239 SAC, ¶ 165. 240 See Iqbal Aff., Ex. F, at 1 (“Working with outside counsel, we put together an outline of a Board meeting at which a proposal is considered and that outline is attached . . . Once you take a look, I would plan on sharing with the Committee as a whole.”).
48 J.P. Morgan developed the sensitivities. 241 The Plaintiff argues the Committee
falsified its minutes to keep from divulging the “cascading downside sensitivity
scenarios” provided by J.P. Morgan. 242 The Plaintiff, however, does not allege that
the Committee knew of the number or precise timing of revised sensitivities given
to management. Nor does the Plaintiff plead facts from which I can make an
inference that the Committee concealed that management was untruthful when it
informed the Board it was creating forecast sensitivities.
As pled, the facts do not lead to a reasonable inference that directors Naylor
and Shearer did more than request financial scenarios and review those scenarios
when they were provided through management. Nothing in the pleadings leads to
an inference that the Director Defendants acted with scienter with respect to the
financial projections.
c. Disclosure in the 14D-9
Finally, the Plaintiff contends the failure to disclose material facts in the 14D-
9 demonstrates bad faith. The Plaintiff points out that our Supreme Court, in review
of my initial decision on the motion to dismiss, concluded that the stockholder vote
in favor of the merger had no cleansing effect because the proxy contained material
omissions. The inquiry here, however, under Rule 12(b)(6), requires a pleading of
241 SAC, ¶ 178. 242 Pl. Sell-Side Br., at 30, 59.
49 facts with respect to the omissions from which I may reasonably infer breach of the
duty of loyalty, and not simply adequate pleading of a material omission. 243 I have
already found above that the SAC does not state a claim of director interestedness,
and so allegations regarding disclosure must plead bad faith. Bad faith, in the
context of omissions, requires that the omission be intentional and constitute more
than an error of judgment or gross negligence.244 The Plaintiff’s argument relies on
the presumption of misconduct in operating a bad-faith sham auction; in this view,
the omissions are explained as a subsequent concealment of that misconduct.245 But,
as stated above, I do not think the alleged facts create a reasonable inference that the
Director Defendants acted on improper motives; therefore the “cover-up” theory
243 Nguyen v. Barrett, 2016 WL 5404095, at *3 (Del. Ch. Sept. 28, 2016) (“[W]hen asserting a disclosure claim for damages against directors post-close, a plaintiff must allege facts making it reasonably conceivable that there has been a non-exculpated breach of fiduciary duty by the board in failing to make a material disclosure.” (citing Chen v. Howard, 87 A.3d 648, 691 (Del. Ch. 2014))). 244 See Kahn v. Stern, 2017 WL 3701611, at *14 (Del. Ch. Aug. 28, 2017), aff’d, 183 A.3d 715 (Del. 2018) (“to state a non-exculpated claim the Plaintiff cannot simply point to erroneous judgment in the failure to make a disclosure, implicating the duty of care, but rather must point to facts in the Complaint supporting an inference that the Board acted in bad faith in issuing the disclosure, implicating the duty of loyalty.”); In re BioClinica, Inc. S’holder Litig., 2013 WL 5631233, at *8 (Del. Ch. Oct. 16, 2013) (“[A]ny disclosure claim that does not adequately allege a violation of the duty of good faith cannot survive the exculpation provision in [the] certificate of incorporation.”); In re Alloy, Inc., 2011 WL 4863716, at *14 (Del. Ch. Oct. 13, 2011) (“An exculpatory provision under 8 Del. C. § 102(b)(7) . . . would preclude . . . a claim for money damages for disclosure violations that were made in good faith—i.e., for failures to disclose resulting from a breach of the fiduciary duty of care rather than from breaches of loyalty or good faith.”). 245 See Pl. Sell-Side Br., at 63–64 (“The defendants who devised or knowingly authorized a sham sale process or knowingly conspired to present artificially downward-adjusted numbers to the Board cannot prevail at the motion to dismiss [stage] by claiming ignorance or mere gross negligence about how the 14D-9 conceals that misconduct.”).
50 fails. The Plaintiff, to withstand the Director Defendants’ Motion to Dismiss based
on disclosures, must adequately allege bad faith in the disclosures themselves.
The Supreme Court found that the 14D-9 omitted material facts that a
stockholder likely would have considered important. 246 The 14D-9 differs from the
facts alleged by the Plaintiff in several significant ways. First, the 14D-9 does not
disclose facts from which stockholders would understand that Berry lied to the Board
about his first contact with Apollo; the 14D-9 states only that Berry made an
agreement with Apollo after it withdrew its first offer, and not on September 25, as
the SAC alleges.247 It omits Berry’s multiple statements regarding his strong
preference for Apollo. It also omits the activist pressure the Board faced from
Neuberger and Berry at the time it decided to sell the Company. These omissions
do not give the stockholders a full and accurate portrait of the decision to sell and
Apollo’s advantages in the sale process.
But, given the facts the 14D-9 does disclose, it is not reasonable to infer that
the 14D-9 represents the knowingly-crafted deceit or knowing indifference to duty
246 Morrison v. Berry, 191 A.3d 268, 283 (Del. 2018), as rev’d (July 27, 2018) (“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.”). 247 See 14D-9, at 17–18 (“Mr. Berry reiterated that he had not committed to any transaction with [Apollo] (or any other potential bidder)”), 20 (“since [Apollo’s] earlier offer had expired on October 20, 2015, Mr. Berry had engaged in one conversation with [Apollo], and during that conversation he had agreed that he would roll his equity interest over into the surviving entity if [Apollo] were to be successful in agreeing to a transaction with [Fresh Market].”).
51 that would show bad faith. The 14D-9 does disclose Berry’s statement that he had
discussed a transaction with Apollo early on, 248 Apollo’s representation of its
partnership with Berry, 249 the news articles describing a Berry-Apollo
relationship,250 and Berry’s November admission of an agreement to roll over equity
in case of a successful Apollo bid.251 The extent of shareholder pressure at the time
of the decision to sell is missing, but the fact that activism was a Board concern is
disclosed. 252 Additionally, some facts regarding the financial scenarios—the 15%
risk adjustment to the Management Projections, the timing of the final submissions
by J.P. Morgan, and statements regarding management preparation—were not
included, but the 14D-9 discloses in extensive detail the projections, the reasons
behind them, and the Board’s reasons for requesting them. 253
248 14D-9, at 17 (prior to initial bid, Apollo “asked Mr. Berry if he would be interested in participating in a transaction through an equity rollover.”). 249 Id. (“[Apollo’s] letter also included a reference that [Apollo] and Messrs. Ray and Brett Berry would be working in an exclusive partnership in connection with a potential acquisition of [Fresh Market].”) 250 Id. (“On October 16, 2015 . . . a news outlet published an article speculating that Ray Berry was exploring a bid to take [Fresh Market] private with the help of a private equity firm and that [Apollo] had agreed to work with Mr. Berry on a potential offer for [Fresh Market].”). 251 Id. at 20 (“[Berry] had agreed that he would roll his equity interest over into the surviving entity if [Apollo] were to be successful in agreeing to a transaction with [Fresh Market].”). 252 Id. at 18 (“Also at the October 15, 2015 Board meeting, to enhance efficiency in light of the fact that [Fresh Market] could become the subject of shareholder pressure and communication and potentially additional unsolicited acquisition proposals in light of [Fresh Market’s] recent stock performance, the Board decided to create a committee. . .”). 253 See id., at 32, 40–50.
52 Consistent with the Supreme Court’s decision, the omission of the material
facts described above creates an inference that the crafters of the 14D-9 at least
negligently failed to portray the full extent of Apollo’s advantage in the sale through
its early agreement with Berry, Berry’s lie to the Board and his preference for
Apollo, and the stockholder pressure that encouraged the sale in the first place. But
given what the 14D-9 discloses, I do not think it is reasonable to infer that the
omissions, though material, demonstrate an intentional derogation of duty or an
intent to create a misleading document. If the Director Defendants’ intent was to
ensure that the 14D-9 would entice stockholders to vote for the merger in the
mistaken belief that the directors were unaware of activist pressure, or to hide that
Berry’s weight was behind the Apollo bid, they did a poor job, indeed. So poor, I
find, that a reasonable inference of bad faith in the omissions cannot be drawn.
B. The Plaintiff States a Claim for Breach of the Duty of Loyalty against Berry
As with the Director Defendants, the Plaintiff must plead a non-exculpated
claim against Berry, which requires sufficiently alleging he was either self-interested
or acted in bad faith. 254 I deny the Berrys’ Motion to Dismiss as it relates to Ray
254 Nguyen v. Barrett, 2016 WL 5404095, at *3 (Del. Ch. Sept. 28, 2016) (“when asserting a . . . claim for damages against directors post-close, a plaintiff must allege facts making it reasonably conceivable that there has been a non-exculpated breach of fiduciary duty. . .” (citing Chen v. Howard, 87 A.3d 648, 691 (Del. Ch. 2014))).
53 Berry because the SAC adequately alleges that Berry acted in self-interest and in bad
faith in a manner that conceivably harmed Fresh Market.
As Berry notes, he absented himself from the Fresh Market transaction. After
informing the board on October 15 that he was unaware of any other private equity
buyers with whom he would be comfortable doing an equity rollover, Berry recused
himself from the meeting. 255 After this recusal, Berry ceased to attend board
meetings or otherwise participate in the transaction on behalf of the Company.256
Although he expressed disgruntlement to Anicetti that the Company did not fast-
track Apollo, the alleged facts do not give rise to the inference that he attempted to
influence or participate as a director on the Fresh Market side of the deal after
October 15. Under Delaware law, deliberate and effective removal from the
decision-making process can shield a director from liability from claims that he was
an interested party. 257
The SAC, however, also pleads facts that, accepted as true for the purpose of
deciding this motion, show that Berry engaged in a pattern of misdirection and lack
255 SAC, ¶ 88–89. 256 Berry also waived his right to notice of further meetings. 14D-9, at 18–19. 257 See In re Tri-Star Pictures, Inc. Litig., 1995 WL 106520 (Del. Ch. Mar. 9, 1995) (“Delaware law clearly prescribes that a director who plays no role in the process of deciding whether to approve a challenged transaction cannot be held liable on a claim that the board’s decision to approve that transaction was wrongful.”); see also Citron v. E.I. du Pont de Nemours & Co., 584 A.2d 490 (Del. Ch. 1990) (“because the [directors] played no role in the Merger Committee’s, or the Board’s, decisionmaking process . . . plaintiff has failed to establish a factual or legal basis for a claim against [them].”).
54 of candor with the Board for nearly five months prior to the sale process. From this,
I can reasonably infer he was not motivated by the best interests of the Company,
and that he intentionally ignored his duties as a director. According to the alleged
facts, Berry first spoke to Apollo concerning a transaction on July 3, 2015.258
Company procedure obliged him to disclose Apollo’s interest to the Board. 259 His
fiduciary duty required the same. 260 It is not reasonably arguable that Berry did not
understand this obligation: his fellow directors brought private equity overtures to
the Board, and Berry himself shared an indication of interest from Oak Hill Capital
Management in September. 261 But rather than disclose Apollo’s interest to the
Board, he kept the communications private for July, August, and September, and
during that time he formulated a proposed transaction with Apollo.262 He did this
knowing the Board was attempting to navigate offers in the midst of a company
turnaround.263
Berry went as far as forming an oral agreement to roll over his equity in case
of a successful bid before he contacted Duggan regarding how Apollo should present
258 SAC, ¶¶ 55–58. 259 See id. ¶¶ 61–62. 260 See HMG/Courtland Properties, Inc. v. Gray, 749 A.2d 94, 119 (Del. Ch. 1999) (“[D]irectors have an ‘unremitting obligation’ to deal candidly with their fellow directors” regarding interested transactions). 261 SAC, ¶¶ 70, 74. 262 Id. ¶¶ 62, 67, 75. 263 Id. ¶¶ 70, 74.
55 the proposal.264 This created a situation in which Duggan and Noll addressed
Neuberger’s desire for a sale of the Company within a few days of Duggan
discovering that Berry, the Company’s Chairman, was cooperating with a private
equity firm to propose a buyout.265
To compound the situation, Berry intentionally obscured the extent of his
involvement with Apollo: he downplayed discussions with Apollo to Duggan,
portraying his stance as a willingness to sell or roll over his equity contingent upon
Board approval. 266 However, the communication between Apollo and the Company
imply, and for the pleading stage I infer, that Berry was working exclusively with
Apollo to take Fresh Market private. Thereafter, Berry lied, claiming to Duggan he
had no commitment to or agreement with Apollo. 267 When Duggan reported this to
the Board, Berry confirmed his purported lack of commitment or agreement.268
Further compounding the situation, Berry failed to correct the misleading statements
while the Board dealt with Apollo’s initial offer, digested leaked publicity, publicly
264 Id. ¶¶ 76–77. 265 Id. ¶¶ 77–79. 266 Id. ¶ 84. 267 Compare id. ¶ 86 (Berry represented he “had no arrangement or agreement with Apollo”) with id. ¶ 104 (“[Berry] agreed, as he did in October, that, in the event Apollo agreed on a transaction with [Fresh Market], he would roll his equity interest over into the surviving entity . . . Mr. Berry’s agreement with Apollo is oral.”). 268 Id. ¶ 87.
56 announced a strategic review, and received a renewed offer from Apollo.269 Only
when prompted did Berry concede his prior agreement with Apollo.270 Knowing the
Company was in a strategic review and had an offer on the table, Berry accompanied
his disclosure with a notification that he would “give serious consideration to selling
his stock” into the market absent a going-private transaction.271
Accepting this alleged narrative as true, I find it reasonably conceivable that
Berry acted for reasons other than the Company’s best interest. Berry argues that a
more logical tactic, if he wanted to pressure the Company to sell to Apollo, would
be to overstate—rather than obfuscate—his commitment to Apollo. This is
unpersuasive; a director owes candor to his fellows, a duty Berry consciously
avoided. While Berry’s motives for taking this approach may be obscure, I cannot
reasonably infer that his repeated misdirection and his lie to the Board were
motivated by the Company’s best interests. And while the Plaintiff makes
allegations regarding Berry’s motives, and why his breaches were helpful to him and
harmful to the Company, I need not resolve that matter at this pleading stage. While
a stockholder may exercise her rights with respect to her stock as she sees fit, when
she is acting as a fiduciary it must be in the corporate interest. Because of that, I
269 See id. ¶¶ 89–104. 270 Id. ¶ 104. 271 Id.
57 draw the inference in Plaintiff’s favor and find it reasonable to conclude that Berry
acted—qua director—with his own interests as a potential buyer foremost.
Again, the Plaintiff’s allegations support a reasonable inference of bad faith
because as alleged, the facts suggest Berry intentionally disregarded his fiduciary
duties and instead pursued self-interest. Aware of manifest interest in the company
and the pressure on the Board, Berry allowed the Board to make decisions with
incomplete knowledge of his commitment to Apollo. Even after he recused himself,
he left the Board in the dark about his agreement, and he shared the full story only
when prompted on the threshold of a decision to initiate the sale process. 272
In other words, the “difficult situation” the Board faced in December 2015
was due, in part, to Berry. While Berry contends he fulfilled his fiduciary duties in
full by adequately disclosing his interests before the Board initiated a sales process,
I can reasonably conceive based on the alleged facts that nearly five months of
serious misinformation regarding the Chairman’s relationship with the strongest
prospective buyer created a harm. 273 As alleged, Berry’s silence, falsehoods, and
misinformation conceivably violated the basic principle that “fiduciaries . . . may not
use superior information or knowledge to mislead others in the performance of their
272 Id. ¶¶ 104, 110. 273 Berry argues stringently that damages cannot result from his actions, given the disclosures he made to the Board in the November Email. Damages, however, are not an element of a breach of fiduciary duty cause of action, and consideration of damages awaits a developed record.
58 own fiduciary obligations.”274 The Berrys’ Motion to Dismiss, as it regards Ray
Berry, therefore, is denied.
C. The Plaintiff States a Claim for Breach of Fiduciary Duty against Duggan
Duggan was Fresh Market’s General Counsel.275 As an officer of Fresh
Market, Duggan is not exculpated by the Company’s 102(b)(7) provision. The
Plaintiff may plead either a breach of the duty of care or loyalty to overcome
Duggan’s Motion to Dismiss. Standards for breaches of the duty of loyalty have
been described above. A breach of the duty of care exists if Duggan acted with gross
negligence. 276 Gross negligence involves more than simple carelessness. To plead
gross negligence, a plaintiff must allege “conduct that constitutes reckless
indifference or actions that are without the bounds of reason.”277 The Plaintiff must
plead sufficient facts to make it reasonable to conclude that Duggan has failed this
standard. The Plaintiff’s allegations here center on three areas: Duggan’s
communications with Berry in the fall of 2015, his involvement in the preparation
of additional financial projections by J.P. Morgan, and his role in the preparation of
274 Mills Acquisition Co. v. Macmillan, Inc., 559 A.2d 1261, 1283 (Del. 1989); see also Guth v. Loft, Inc., 5 A.2d 503, 510 (Del. 1939) (“Corporate officers and directors are not permitted to use their position of trust and confidence to further their private interests.”). 275 SAC, ¶ 4. 276 See Zucker v. Hassell, 2016 WL 7011351, at *7–8 (Del. Ch. Nov. 30, 2016), aff’d, 165 A.3d 288 (Del. 2017) (defining a breach of the duty of care as “having committed gross negligence.”). 277 Zucker, 2016 WL 7011351, at *7 (quoting Ironworkers Dist. Council of Phila. & Vicinity Ret. & Pension Plan v. Andreotti, 2015 WL 2270673, at *26 n.254 (Del. Ch. May 8, 2015)).
59 the 14D-9. For the reasons explained below, I find that while the allegations against
Duggan do not successfully plead a claim for a breach of the duty of loyalty, they
adequately allege gross negligence with regard to the disclosures in the 14D-9, and
on that ground I deny Duggan’s Motion to Dismiss.
First, the Plaintiff alleges Duggan’s interests in the transaction improperly
motivated him to help complete a sham sale.278 A change-in-control would bring
Duggan $1.2 million in single-trigger equity-based compensation, with an additional
$1.1 million in double-trigger compensation if he were terminated following the
merger.279 The change-in-control benefit was not exclusive to a purchase by Apollo,
I note, and would not predispose Duggan to encourage a sale to Apollo exclusively,
nor a sale at an unfair price. Generally, change-in-control benefits arising out of a
pre-existing employment contract do not create a conflict, 280 and nothing in the
alleged facts suggests Duggan’s single-trigger bonus was unique or specially
negotiated in anticipation of the Apollo transaction. The fact that Duggan remained
with the Company following the transaction suggests his double-trigger
compensation was not a motive.
278 SAC, ¶ 235. 279 Id. ¶ 10. 280 In re Novell, Inc. S’holder Litig., 2013 WL 322560, at *11 (Del. Ch. Jan. 3, 2013) (“[T]he possibility of receiving change-in-control benefits pursuant to pre-existing employment agreements does not create a disqualifying interest as a matter of law” (citing In re Smurfit-Stone Container Corp. S’holder Litig., 2011 WL 2028076, at *22 (Del. Ch. May 20, 2011), as rev’d (May 24, 2011); Nebenzahl v. Miller, 1993 WL 488284, at *3 (Del. Ch. Nov. 8, 1993))).
60 The Plaintiff’s remaining allegation—that Duggan helped engineer a sham
transaction “to ingratiate himself with Ray Berry and Apollo” so he could remain
with the company and fulfill a “person goal[]” of moving into a business role—is
largely conclusory. 281 It is also belied by the fact, as the Plaintiff herself notes, that
a double-trigger bonus was available to Duggan upon termination. The fact that
sometime after the merger, Duggan received a business role “in addition to General
Counsel” does not sufficiently support an inference of a quid pro quo with the buyers
for improper support of Apollo.282 The Plaintiff also points to the fact that Berry
emailed Duggan following the merger and thanked him for his “smart and caring
work” and suggested a glass of wine. 283 This, to my mind, is not the smoking gun
that the Plaintiff posits. It is too weak a reed to support a reasonable basis from
which to infer Duggan was working for Berry against the interests of the Company.
In sum, I cannot infer from the alleged facts that improper motives guided Duggan
through the sale process. I note that all the inferences the Plaintiff asks me to draw
above are in support of breach of the duty of loyalty; nothing in that part of the
pleading supports an inference of gross negligence.
281 SAC, ¶ 10. 282 Id. 283 Id. ¶ 194.
61 The Plaintiff also alleges Duggan’s inquiries with Berry in September and
October 2015—which the Plaintiff characterizes as insufficiently rigorous—
breached his fiduciary duty. As a general rule, an officer does not have a duty to
probe into wrongdoing unless he has reasonable suspicion that such activity is
afoot.284 According to the alleged facts, Duggan first received news of Apollo’s
interest from Berry on September 25, and then from Jhawar at Apollo on September
28.285 Thus, he knew that Berry and Apollo had communicated and that Apollo’s
bid was forthcoming.286 When that bid arrived, it stated as fact that Berry and Apollo
were in an exclusive relationship.287 At that point, Duggan went to Berry and asked
him about this purported relationship, and Berry denied it. 288 Duggan reported
Berry’s version to the Board, which declined further inquiries.289 When Berry made
284 See In re Caremark Int’l Inc. Derivative Litig., 698 A.2d 959, 969 (Del. Ch. 1996) (“[A]bsent grounds to suspect deception, neither corporate boards nor senior officers can be charged with wrongdoing simply for assuming the integrity of employees and the honesty of their dealings on the company’s behalf.”). 285 SAC, ¶¶ 77–78. 286 Plaintiff reads Duggan’s failure to communicate these communications immediately to the Board as evidence of Duggan’s complicity with Berry, but the SAC does not allege Duggan withheld any facts or otherwise failed to inform the Board as it reacted to Apollo’s bid over the following weeks. 287 SAC, ¶ 80. 288 Id. ¶¶ 83–84. 289 Id. ¶ 87.
62 his contrary disclosure in the November Email, Duggan reported it in full to the
Board. 290
As alleged, these facts show that when prompted by Apollo’s offer, Duggan
investigated by asking Berry about his relationship with Apollo. The Plaintiff offers
a list of follow-up questions and forensics she contends Berry’s answer should have
prompted. 291 It may have been wise to explore further. Failure to do so may have
been poor lawyering. Given the circumstances and inquires Duggan made, however,
I do not find the Plaintiff has pleaded facts supporting gross negligence. Prompted
by Apollo’s offer, Duggan investigated, received Berry’s account, reported it to the
Board, and Berry confirmed it.292
Plaintiff next alleges Duggan breached his fiduciary duties by organizing a
scheme to obtain downward revised projections from J.P. Morgan without allowing
Noll’s input. Duggan’s motive, according to the Plaintiff, was to create a lower price
range that would justify the Board’s decision to sell, thus completing the sham
process.293 In the Plaintiff’s scenario, Duggan’s behavior is intentional and
implicates a breach of loyalty.
290 Id. ¶ 110 (“Duggan read the November 28 Email in its entirety to the Board.”). 291 See Pl. Sell-Side Br., at 13. 292 SAC, ¶¶ 83, 87. 293 Id. ¶ 158 (“Duggan worked to . . . drive the creation of downward sensitivities that could support a Board decision to sell the Company. Duggan executed a Cravath-driven process to facilitate a sale to Apollo in the face of fading bidder interest from anyone else. . .”).
63 I find that the communications on which the Plaintiff relies in the SAC
undermine an inference of a scheme to screen Noll. As alleged, Duggan organized
a meeting with outside counsel and two members of the Committee—Naylor and
Shearer—to discuss “process and legal matters.”294 Later, he elaborated that the
meeting was to “walk through the type of information that we should expect the
Board will receive in the event an offer is presented. . .” 295 Duggan included Noll
on the emails setting up the meeting. 296 The timing of the meeting was dictated by
the sales process. Noll, however, was abroad on Company business. At the meeting,
the Committee determined to request “additional financial projection scenarios”
from management. 297 Afterward, according to the Plaintiff’s allegations, Duggan
recounted the meeting to Noll but said nothing about the financial scenarios.298 The
communications the Plaintiff incorporates by reference, however, indicate that
Duggan intended to share all the materials and plans with Noll after review by the
Committee members who had requested the scenarios.299
294 Id. ¶ 159. 295 Id. ¶ 161. 296 See Iqbal Aff., Ex. C (including Noll in emails arranging Committee meeting). 297 SAC, ¶ 162. 298 Id. ¶ 163. 299 See Iqbal Aff., Ex. F (“Working with outside counsel, we put together an outline of a Board meeting at which a proposal is considered and that outline is attached . . . Once you take a look, I would plan on sharing with the Committee as a whole.”).
64 I do not find Duggan’s process evinces a breach of loyalty or bad faith. Nor
do I see sufficient allegations from which to infer gross negligence. Suggesting
additional financial scenarios to prepare the Board for bids—particularly when the
last projections were three months old—reasonably suggests Duggan was fulfilling
his duties on behalf of the Company, not acting outside the bounds of reason. The
scheme to keep Noll in the dark is not supported by the facts as alleged. As noted,
the emails incorporated into the complaint by reference suggest Duggan in fact
shared with Noll the plans to request additional financial scenarios. In support of
her argument, the Plaintiff points to the fact that six months before, Noll had said
that offers based on “current valuation” were “non-starters” and suggested a value
range of approximately $45-$70 per share.300 Noll’s view of the Company’s value
six months before cannot reasonably support an inference that Duggan schemed to
keep the financial projections from Noll, particularly when Duggan indicated he
intended to share those very projections with Noll.
Finally, the Plaintiff alleges Duggan’s role in the 14D-9 demonstrates a breach
of his fiduciary duties. The SAC notes that Duggan was “responsible for drafting
the 14D-9” and that he “certified the accuracy” of the disclosure. 301 I have already
described the omissions present in the 14D-9 earlier and will not repeat them in full
300 Id. ¶ 70. 301 Id. ¶¶ 22, 199.
65 here. Importantly, our Supreme Court found four omissions, at least, to be material:
The 14D-9 omits (1) that Berry lied to the Board about his agreement with Apollo,
(2) his statements suggesting a clear preference for Apollo and unwillingness to
consider an equity rollover with other parties, (3) his indication that he might sell his
shares if the Company did not embark on a sale, and (4) the “depth and breadth” of
current shareholder pressure.302 As I also discussed, the 14D-9 does disclose that
Berry made an agreement with Apollo, that news of his agreement leaked to the
press, that Apollo represented its relationship with the Berrys as exclusive, and that
the Board was concerned about the prospect of activist pressure. The omissions,
while material, do not support an inference of bad faith. The Plaintiff argues that
the omissions suggest that Duggan intended to disguise his disloyal actions, but as
just recounted, on examination of Duggan’s involvement in the sale process, I have
already found that it does not adequately plead disloyalty on Duggan’s part.
I turn, then, to the allegations of gross negligence. “Because fiduciaries . . .
must take risks and make difficult decisions about what is material to disclose, they
are exposed to liability for breach of fiduciary duty only if their breach of the duty
302 See Morrison v. Berry, 191 A.3d 268, 284–288 (Del. 2018), as revised (July 27, 2018). I note that the Plaintiff makes allegations of other deficiencies in addition to those addressed by the Supreme Court. Those allegations are detailed in the background section of this Opinion, but I do not need to consider them for the purposes of this decision.
66 of care is extreme.” 303 Drawing all reasonable inferences for the Plaintiff, I find the
allegations conceivably support such a claim here. Our Supreme Court held that as
offered, the 14D-9 “presents a distorted narrative.”304 For reasons already explained,
I do not find that the omissions support an inference of a subsequent concealment of
misconduct or a bad faith intent to harm the Company. Given the omissions,
however, the 14D-9 offers stockholders a version of events that, as our Supreme
Court found, left them lacking information material to a decision. Such a distortion
of events creates a reasonable inference for the Plaintiff at this stage that Duggan
conceivably acted with gross negligence in his role as Fresh Market’s General
Counsel with regard to the 14D-9.
Given Duggan’s role as General Counsel, and given the sales process as pled,
I can infer that the omitted facts were omitted with his knowledge. It is reasonably
conceivable that crafting such a narrative to stockholders, while possessed of the
information evincing its inadequacy, represents gross negligence on Duggan’s part.
Stated simply: 1) the 14D-9 disclosures were materially inadequate; 2) Duggan
drafted those disclosures; 3) I can infer that Duggan possessed sufficient facts to
know they were materially inadequate; 4) I can infer, then, that Duggan knew he was
303 Metro Commc’n Corp. BVI v. Advanced Mobilecomm Techs. Inc., 854 A.2d 121, 157 (Del. Ch. 2004). As the Court in Metro explains, “a fiduciary in the corporate context cannot be held liable for damages for a failure to disclose a material fact unless that fiduciary acted with at least gross negligence.” Id. at 157. 304 Morrison, 191 A.3d at 285.
67 creating a misleading proxy, and was at least indifferent to his contrary duty to
stockholders; and thus 5) the inadequate proxy was the result of Duggan’s gross
negligence. Of course, another reasonable interpretation is that the 14D-9 represents
a good faith but failed effort to make reasonable disclosures,305 but given the
pleading stage, I must choose the inference favoring the Plaintiff. Therefore, his
Motion to Dismiss is denied.306
D. The Plaintiff States a Claim for a Breach of Fiduciary Duty against Anicetti
The Plaintiff asserts claims against Anicetti for his roles both as an officer and
director. Thus, Anicetti is entitled to protection under 102(b)(7) only for actions he
took in his capacity as director. 307 Accepting all well-pled facts as true, I do not find
the SAC adequately alleges that Anicetti breached his duty of loyalty as a director,
but I do find it adequately alleges a breach of the duty of care in his capacity as CEO
of Fresh Market.
305 As Duggan points out, I initially and erroneously determined that the omissions in the 14D-9 were not material. Morrison v. Berry, 2017 WL 4317252 (Del. Ch. Sept. 28, 2017), rev’d, 191 A.3d 268 (Del. 2018), as rev’d (July 27, 2018). 306 At this stage, the Plaintiff is not required to show that damages resulted from Duggan’s actions. 307 1 R. Franklin Balotti & Jesse A. Finkelstein, Delaware Law of Corporations and Business Organizations § 4.13 (3d ed. 2017) (“[O]ne who is a director and an officer may be exempted from liability for his or her acts qua director. . .”); Arnold v. Society for Sav. Bancorp, Inc. 650 A.2d 1270, 1288 (Del. 1994) (“[O]nly those actions taken solely in the defendant’s capacity as an officer are outside the purview of Section 102(b)(7).”).
68 First, the Plaintiff contends that Anicetti’s employment improperly motivated
him to push the merger through for as low a sale price as possible. 308 As noted
above, employment agreements not specially negotiated in light of the transaction at
issue ordinarily do not make the officer conflicted under Delaware law. 309 Anicetti
signed a standard company agreement, in conformance with compensation and
severance plans dating back to 2010.310 His agreement provided for single-trigger
bonuses, which could incentivize him regarding a sale, but the Plaintiff does not
allege Anicetti specially negotiated or engineered this change-of-control structure.
Further, I can infer that this equity-based bonus aligned Anicetti’s goals with that of
the other stockholders. 311
The Plaintiff asks me to infer a conflict because Apollo advertised that its
interests would be aligned with management’s because it based compensation on
multiples of invested capital.312 This suggests that a low buyout price would make
308 SAC, ¶ 184. 309 In re Novell, Inc. S’holder Litig., 2013 WL 322560, at *11 (Del. Ch. Jan. 3, 2013) (“[T]he possibility of receiving change-in-control benefits pursuant to pre-existing employment agreements does not create a disqualifying interest as a matter of law” (internal citations omitted). 310 Transmittal Aff. of Jamie L. Brown in Support of the Op. Br. in Support of Def. Richard Anicetti’s Mot. to Dismiss Pl.’s Verified Sec. Am. Compl. (“Brown Aff.”) Ex. 2 at ¶ 8; id. Ex. 3; id. Ex. 1, at 5. 311 In re W. Nat. Corp. S’holders Litig., 2000 WL 710192, at *12 (Del. Ch. May 22, 2000) (holding that “significant equity interest in the Company” by an executive “aligned him economically with the public shareholders”). 312 SAC, ¶ 184.
69 hitting high multiples, post-merger, easier. 313 But I cannot reasonably infer that
speculative future performance bonuses would motivate Anicetti to engineer a low
price, damaging the present value of his equity vesting. In sum, I do not find that
Anicetti’s employment agreement or change-in-control bonuses deprived him of
independence. 314
Next, Plaintiff focuses on the Management Projections and the financial
sensitivities created toward the auction’s close. Anicetti designed the Management
Projections, and the Plaintiff does not allege that they were other than his best
estimates. The Board was informed of the 15% overall risk adjustment included in
those projections. 315 In February, the Board, through the Committee, requested
additional financial projections, and Anicetti’s role as officer was properly to
respond to the Board’s request. 316
Anicetti’s breach, according to the Plaintiff, was in making the revised
projections more palatable to the Board by characterizing the Management
313 Id. 314 The SAC does not detail how, even if a low sale price might benefit Anicetti, such benefit would be material to him. See id. ¶ 184 (alleging the multiple of invested capital metric “created a conflict of interest for Anicetti and Ackerman, because a lower buyout price of Fresh Market makes it easier for Apollo to hit [multiple of invest capital] multiples.”). 315 Id. ¶ 185. 316 Amalgamated Bank v. Yahoo! Inc., 132 A.3d 752, 781 (Del. Ch. 2016), abrogated by Tiger v. Boast Apparel, Inc., 214 A.3d 933 (Del. 2019) (“[O]fficers have a duty to comply with the board’s directives.”).
70 Projections as “optimistic.”317 At the March 10 meeting, Anicetti described the
December Projections as “more of an ‘optimistic’ case at this point” and “an
optimistic scenario if every element of that plan went according to estimates from
both an execution and timetable standpoint.”318 In contrast, as the Plaintiff points
out, management had recently reaffirmed these same projections: as late as March
1, CFO Ackerman told J.P. Morgan that management still planned to “execute
against” the projections. 319 Additionally, the 2016 operating plan management
submitted to the Board tracked the Management Projections. 320
Anicetti’s statements regarding the Management Projections are important
because they tended to justify the Board’s accepting the revised valuation range
provided by J.P. Morgan. To my mind, his statements, if false, would implicate his
duty of loyalty, not gross negligence. That is, given Anicetti’s intimate knowledge
of the Management Projections and his oversight of the Company’s performance, if
the statements were blatantly false, as Plaintiff contends they were, it is not
reasonably conceivable that the Company’s CEO made them out of carelessness—
gross or otherwise—or indifference to duty. I do not find, however, the allegations
317 SAC, ¶ 185. 318 Id. 319 Id. ¶ 166. 320 Id. ¶ 154.
71 in the SAC support a reasonable inference of a breach of the duty of loyalty regarding
these statements.
The fact that management intended to continue to “execute against” its
projections does not render false any statement that the projections were also
optimistic. Anicetti was brought in to turn the Company around, and to do so
quickly; it would not be surprising if the projections he designed were optimistic.
The Plaintiff also makes much of the 15% risk adjustment already built into the
Management Projections. But both the board minutes and the 14D-9 state that the
Board, despite the fact that it would have known of the risk adjustment, nonetheless
perceived the Management Projections (even so adjusted) as prone to execution
risk.321 Regarding actual business prospects related to the Management Projections,
the Plaintiff alleges that “[p]reliminary results for the first quarter of 2016 showed
that comparable store sales were in line with the plan, while new store sales had
underperformed slightly relative to the plan.” 322 Based on these allegations, I cannot
reasonably infer that Anicetti intentionally misled the Board in bad faith or with
disloyal motives when making the statements at the March 10 board meeting.
321 See Perri Aff., Ex. L, at 18; 14D-9, at 20. As the Plaintiff notes, Anicetti did not remind the Board of the Management Projection’s built-in risk adjustment. SAC, ¶ 192. However, Ackerman told the Board at the December 1, 2015 meeting that “in preparing the projections, management had applied a 15% overall risk adjustment, with different initiatives receiving different risk weighting based on likelihood of achievability.” Id. at 185. Based on this, it is not reasonable to infer that Anicetti actively concealed this aspect of the projections. 322 SAC, ¶ 185.
72 Finally, the Plaintiff argues that Anicetti breached his fiduciary duties with
regard to the 14D-9. The Plaintiff alleges that Anicetti “participated in the drafting
and disseminating” of the 14D-9.323 Anicetti argues that his work with the 14D-9
was so intertwined with his role as director that he should be given the benefit of the
exculpation provision. This may prove true on a more developed record, in which
case his actions are exonerated (absent disloyalty). At the pleading stage, however,
and in light of the allegation that, in his role as CEO, Anicetti participated in
preparing the 14D-9, I infer that Anicetti remains liable in that regard for gross
negligence as well as disloyalty in connection with the proxy.
I have already found that the Plaintiff has pled facts that, together with the
Plaintiff-friendly inferences at the pleading stage, permit an inference of gross
negligence on the part of Duggan in preparing the proxy. While Anicetti, as CEO,
may not have been as intimately involved in the drafting as Duggan, given his role
as a director, I can infer that he possessed the same knowledge as Duggan of Berry’s
actions and of the transaction as a whole. Surely, he was aware of the activist
pressure on the Board. Therefore, because the Plaintiff alleges that “[i]n his role as
CEO,” Anicetti participated in “drafting and disseminating” the 14D-9, and because
I can infer that, like Duggan, he possessed knowledge of what was being omitted, I
323 Id. ¶ 222.
73 find the same analysis that applied to Duggan applies to Anicetti with regard to the
14D-9.
As with Duggan, I can readily infer that Anicetti attempted and failed to create
a proper proxy, and breached no duty. Because I can reasonably infer gross
negligence as well, at the pleading stage I must do so. As described above, the
omissions in the disclosures do not adequately state a claim for a breach of the duty
of loyalty. However, the omissions support an inference of gross negligence, and so
the Plaintiff states a breach of the duty of care against Anicetti. 324 Therefore, his
Motion to Dismiss is denied.
III. CONCLUSION
For the reasons described above, I grant the Director Defendants’ Motion to
Dismiss, and deny Duggan’s Motion to Dismiss, Anicetti’s Motions to Dismiss, and
Ray Berry’s Motion to Dismiss, in part. The parties should supply an appropriate
form of order.
As noted, this Opinion addresses the claims of the parties with fiduciary duties
to Fresh Market because these claims are primary. The Plaintiff’s aiding and
abetting claims against J.P. Morgan, Cravath, and Brett Berry may to some extent
be contingent upon my decision in this Opinion. For this reason, I reserve decision
324 As I noted regarding the claim against Duggan, at this stage, the Plaintiff is not required to show that damages would result from Anicetti’s actions.
74 on these motions to dismiss. The parties should confer and inform me what effect
this Opinion has on proceeding with the remaining motions.
Related
Cite This Page — Counsel Stack
Elizabeth Morrison v. Ray Berry, Counsel Stack Legal Research, https://law.counselstack.com/opinion/elizabeth-morrison-v-ray-berry-delch-2019.