Paul J. Shim, Roger Cooper,and Mark McDonald are partners at Cleary Gottlieb Steen & Hamilton LLP. This post is based on their Cleary memorandum and is part of the Delaware law series; links to other posts in the series are available here.
In an important decision for M&A professionals and other board advisors, the Delaware Court of Chancery addressed a stockholder plaintiff’s claims that the target board’s financial advisor and law firm, as well as the private equity buyer, aided and abetted a breach of fiduciary duty by the target board in connection with a take-private merger. See Morrison v. Berry, C.A. No. 12808-VCG (Del. Ch. June 1, 2020). While the claim against the financial advisor was allowed to proceed, the claims against the law firm and buyer were dismissed. These diverging results provide early guidance as to when the Delaware courts will (and when they will not) dismiss aiding and abetting claims. In many cases, the determining factor will be whether the complaint pleads facts raising a reasonably conceivable inference that the advisor, buyer, or other third party knew the board was engaging in a breach of its fiduciary duty. This has important implications for the way board advisors and M&A buyers should approach a situation in which they become aware that the board of a target company is unaware of some material fact that could conceivably affect its ability to fulfill its fiduciary duties.
Background
This case concerns a two-step going-private transaction in which an affiliate of a private equity sponsor (“Buyer”) acquired The Fresh Market (“Fresh Market” or “the Company”), a specialty grocery chain. In July 2015, Buyer reached out to Ray Berry, chairman of Fresh Market’s board and a significant minority stockholder, indicating Buyer’s interest in taking Fresh Market private. After further communications in which Berry reached an oral agreement to roll over his equity in a transaction with Buyer, which he did not disclose to the Company’s board, the board instituted a public bidding process. During this process, Fresh Market’s financial advisor allegedly provided “inside information” about the bidding process to Buyer, which allegedly was a large client of the financial advisor. The complaint alleged that these communications may have impacted the bidding process, but were not disclosed to the Fresh Market board. Although there were multiple expressions of interest, the bidding process yielded only one definitive bid—from Buyer, on March 8, 2016, for $27.25 per share. After the board determined the same day that the offer was insufficient, Buyer submitted a revised offer of $28.50 per share on March 9. On March 11, the board accepted the offer and approved the merger. On March 25, Fresh Market publicly filed its solicitation/recommendation statement on Schedule 14D-9 (“14D-9”), which omitted certain facts about Buyer’s discussions with Berry and the Company’s financial advisor. The two-step merger closed on April 22, 2016.
