Most readers are probably familiar with the case of Morrison v. Berry.  There, Fresh Market was taken private by Apollo in a two-step tender offer.  After the deal closed, a shareholder filed a lawsuit alleging that the directors had breached their duties and failed to obtain the best price for shareholders because Ray Berry, founder of Fresh Market and Chair of the Board, along with his son, colluded with Apollo to roll over their shares in the new company and rig the sales process in Apollo’s favor.  Defendants contended that shareholders’ acceptance of Apollo’s offer cleansed any breaches under Corwin; therefore, the critical question was whether the shareholders were fully informed.  VC Glasscock held that any omissions were immaterial as a matter of law, and the Delaware Supreme Court reversed, holding that omissions regarding the Berrys’ level of precommitment to Apollo were material.

After remand, the plaintiff filed a new complaint and the defendants renewed their motions to dismiss.  And on December 31, VC Glasscock granted in part and denied in part those motions.  In particular, he held:

(1) The directors other than Ray Berry were independent and disinterested, and neither the sales process nor the omissions evinced bad faith.  In particular, enough was disclosed about Berry’s mendacity and the pressures facing the Board that any additional omissions could not have been intended to fool anyone, since, reading between the lines, shareholders could have sussed out the truth.  (“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.”).  This, of course, is Glasscock’s way of reaffirming his original conclusion that the omissions were not material; the first time around, he held that enough was disclosed that shareholders did not require more details, and the second time around, he held that since so much was disclosed, the remaining omissions must not have been intentional deceptions.

(2) The plaintiff plausibly alleged that Ray Berry acted in bad faith and out of self-interest by misleading the Board about his relationship with Apollo.

(3) Two officer defendants (one of whom was also a director) were not protected by Fresh Market’s 102(b)(7) provision.  Though the plaintiff did not plausibly allege they acted disloyally/in bad faith, the plaintiff did plausibly allege at least negligence with respect to the omissions.  Again, however, Glasscock alluded to his earlier ruling: “another reasonable interpretation is that the 14D-9 represents a good faith but failed effort to make reasonable disclosures…  As [one defendant] points out, I initially and erroneously determined that the omissions in the 14D-9 were not material.”  But, since inferences on a motion to dismiss are drawn in favor of the plaintiff, these claims would survive – for now.

(4) Finally, the court reserved judgment on the plaintiff’s aiding and abetting claims.  The plaintiff alleged that JP Morgan, Cravath, Apollo, and Ray Berry’s son Brett Berry all aided and abetted breaches by concealing Ray Berry’s discussions with Apollo, contributing to the omissions in the 14D-9, and by concealing from the Board that JP Morgan secretly fed Apollo information. 

So, the things that stand out for me:

First, the case is being maintained, in part, due to the inability of corporate officers to exculpate negligence violations under 102(b)(7).  Megan Shaner has written a lot about how officer duties are underdeveloped in Delaware law (see, e.g., Officer Accountability, 32 Ga. St. U.L. Rev. 355 (2016)); this case may become one of the few that permits an exploration of the subject.

Second, I am discomfited by the suggestion that the court’s initial mistake in concluding that the omissions were immaterial might be relevant to a determination of defendants’ scienter.  The logic, apparently, is that if a court innocently believed these facts to be immaterial, corporate officers and directors may have operated under the same good faith misapprehension.

Leaving aside the difference in context – corporate insiders know far more about the business, the shareholders’ priorities, and the details of any omissions than a judge does (especially on a motion to dismiss) – I wonder how far the logic could extend.  After all, in securities cases under Section 10(b), it’s not uncommon to see dismissals on materiality grounds that are reversed on appeal.  Does the initial dismissal suggest that an inference of scienter is defeated, especially given the higher pleading standards for a 10(b) case? Couldn’t you draw exactly the opposite inference, i.e., if corporate insiders actually know a fact, and intentionally leave it out of a narrative but do hint at its existence (making “partial and elliptical disclosures,” in the Delaware Supreme Court’s phrasing), doesn’t that suggest they were strategically playing coy about the facts?

(I am also reminded of In re Ceridian Corp. Securities Litigation, 542 F.3d 240 (8th Cir. 2008), where the errors in the defendant company’s financial statements were so overwhelming that the court figured the mistakes must have been inadvertent; no intelligence could have designed them.)

Third, the court rejected the plaintiff’s allegation that director and CEO Richard Anicetti was motivated to keep the buyout price low because if he stayed with the company, he’d be compensated based on whether Apollo earned particular multiples of invested capital (MOIC) – payments that would become increasingly lucrative the less that Apollo paid Fresh Market stockholders.  Now, compensation tied to MOIC is a new tactic that Guhan Subramanian and Annie Zhao recently identified as having been adopted by private equity buyers to manipulate corporate management; here, however, Glasscock wasn’t buying the argument, in part because any such moves on Anicetti’s part would have cost him up front, to the extent he received a lower price for his own shares.  Still, I expect we’ll continue to see litigation over the practice.

And … yeah, I don’t have a pithy wrap-up here, but I do think the aiding-and-abetting determinations will be interesting.