Court of Chancery Applies Corwin Ratification to Merger Involving Private Equity Firm Favored by Company’s Founder

By: Nicholas I. Froio and Taylor B. Bartholomew

In Morrison v. Berry, C.A. No. 12808-VCG (Del. Ch. Sept. 28, 2017), the Delaware Court of Chancery held on a motion to dismiss that plaintiff failed to plead facts from which it was reasonably conceivable that a tender of nearly eighty percent of the shares of The Fresh Market (the “Company”) was uninformed or coerced for purposes of surviving ratification under applicable caselaw in connection with the Company’s acquisition by private equity firm Apollo Management, L.P. (“Apollo”).

Prior to the merger, Ray Berry, the founder of the Company, who was a director of the Company, and, together with his son, owned approximately ten percent of the Company’s outstanding common stock, approached potential equity investors, including Apollo, about an acquisition of the Company without first informing the Company’s board of directors (the “Board”).  Berry ultimately reached an agreement with Apollo pursuant to which Berry would roll-over his equity interests in the Company in an acquisition by Apollo.  Apollo then made an unsolicited offer to acquire the Company.  Berry recused himself from consideration of a potential sale of the Company.  The remainder of the Board, consisting of eight independent directors, formed a special committee and conducted a three-month auction with the assistance of J.P. Morgan Securities LLC acting as the Company’s financial advisor.  Apollo emerged as the successful bidder, and the Board, acting on the special committee’s recommendation, approved the merger.  Nearly eighty percent of the Company’s stockholders subsequently tendered their shares.

Plaintiff, a stockholder of the Company, alleged that the director defendants had breached their fiduciary duties by providing misleading disclosures to the Company’s stockholders, and failing to disclose to such stockholders that Berry had already favored Apollo as the Company’s would-be acquiror resulting in the auction process for the sale of the Company being a “sham,” and thus rendering the tender uninformed.  Plaintiff also alleged that the Company’s financial disclosures were inadequately described.  As a majority of the stockholders of the Company tendered their shares, the Court noted that the Board’s decision to approve the merger would be subject to the doctrine adopted by the Delaware Supreme Court in Corwin v. KKR Financial Holdings LLC, i.e., that if a majority of the Company’s fully informed, disinterested and uncoerced stockholders tendered their shares, such tender would ratify the Board’s decision to approve the merger unless plaintiff could successfully allege waste.

In rejecting plaintiff’s disclosure claims, the Court stated that the transaction “present[ed] an exemplary case” for ratification under Corwin and held that (i) the Company’s financial disclosures were sufficiently described, and (ii) the facts underlying Berry’s relationship with Apollo as of the time of the auction process, and subsequent go-shop period, were adequately disclosed.  As such, the Court found that the factual record did not support plaintiff’s contention that the auction process was a sham.  Accordingly, because plaintiff did not allege waste, the Court granted the director defendants’ motion to dismiss.

Morrison v. Berry, C.A. No. 12808-VCG (Del. Ch. Sept. 28, 2017)