A decision from the Delaware Supreme Court this summer highlighted the importance that boards set clear guidelines when considering a transaction in which the interests of management might diverge from those of the stockholders, as in a sale of the company.
The case, Morrison v. Berry, involved a bid to purchase supermarket chain The Fresh Market and disclosure failures on the part of management. In the Morrison decision, the Chancery Court dismissed the plaintiff's claim that the board had breached its fiduciary duties, relying on the "cleansing" stockholder vote approving the transaction. The Supreme Court reversed the ruling; providing a "cautionary reminder" on how to approach a significant transaction and avoid risking potential and unnecessary stockholder litigation.
In 2015 The Fresh Market received an unsolicited takeover proposal from Apollo Global Management LLC. In its offer, Apollo disclosed that it had discussed with Ray Berry, the company's founder, about whether he would agree to roll his 10 percent ownership equity into the deal instead of selling his shares for cash along with the other stockholders.
Though the founder--who was also on the board --had recused himself from the board decision regarding the bid, he did advise the board that he had no agreement with Apollo regarding the transaction. Apollo ultimately entered into an agreement to acquire the company, and stockholder approval of the transaction was sought.
It was later revealed that before Apollo made its offer, the founder had been in contact with representatives from Apollo and had supported their proposal, a fact that was not apparent from the public disclosures regarding the transaction.
The court found that the documents that had been sent to the stockholders describing the transaction had misrepresented significant matters which, if properly disclosed, would have helped the stockholders to reach a "materially more accurate assessment of the probative value of the sale process."
The misrepresentations included failure to disclose the following:
* Before the board had considered Apollo's proposal, the founder had agreed to roll his equity interest into the deal, putting him on the same side of the table as the buyer;
* The founder had suggested to the board that, in light of the low valuation and changes in the business, the board should pursue a sale of the company, and that if the company remained public he would strongly consider selling his shares because...