Morrison v. Berry

Corwin gives powerful effect to a transaction approved by fully informed, uncoerced, disinterested stockholders, including stockholders who tender into a first-step tender offer. But its premise is that stockholders can protect themselves by making an informed economic choice. When the disclosures omit material facts or create a materially misleading account of the sale process, stockholder acceptance cannot have the cleansing effect Corwin recognizes.

The directors bore the burden of showing that the tender was fully informed. At the pleading stage, Morrison needed to support a rational inference that material facts were omitted or that the disclosures were materially misleading. The Court accepted well-pleaded allegations as true and drew reasonable inferences in Morrison’s favor.

A fact is material when there is a substantial likelihood that a reasonable stockholder would consider it important in deciding whether to tender, meaning that it would significantly alter the total mix of available information. Materiality does not require proof that disclosure would actually have changed a stockholder’s vote. Information may be material because a reasonable investor would consider it relevant to the decision, whether it tends to favor or disfavor tendering.

Once directors choose to describe the background and process of a transaction, they must do so accurately, fully, and fairly. A disclosure cannot avoid liability by selectively reporting favorable portions of a conversation while omitting qualifying facts that make the disclosed account misleading. Stockholders are entitled to a balanced account, not a sanitized narrative of director conduct and deal negotiations.

The November 28 email from Berry’s counsel said that, during a later conversation with Apollo, Berry agreed to roll over his equity interest “as he did in October.” The 14D-9 omitted the quoted phrase. That omission supported the reasonable inference that Berry had already agreed in October to participate in an Apollo transaction, despite having told the Board on October 15 that he had not committed to any transaction with Apollo or another buyer.

The omitted October agreement mattered not merely because it showed a possible commitment to Apollo, but because it suggested that Berry had not been candid with his fellow directors when directly asked about his arrangement with Apollo. A reasonable stockholder would consider it important that a founder-director with a substantial financial interest may have misled the Board while a sale process was being structured.

The 14D-9 also presented a restrained account of contacts among Apollo, Ray Berry, and Brett Berry. It described a pre-proposal Apollo call to Ray Berry as a courtesy call, while Apollo’s Schedule TO indicated that the call confirmed the Berrys’ willingness to participate in an equity rollover. The disclosures further omitted that Ray Berry had directed Apollo to speak with Brett Berry about rollover structures and that Apollo and Brett then had several discussions about transaction structures.

Taken together, these allegations supported an inference that the 14D-9 obscured the depth of the Berrys’ and Apollo’s preexisting alignment. That information would help stockholders assess whether the sale process gave Apollo an improper advantage and whether the apparent auction was genuinely open to competing bidders. The alleged omissions therefore prevented Corwin cleansing at the pleading stage.

The 14D-9 stated that Berry would sell his shares for cash in a Board-supported transaction with another purchaser and suggested that he would consider rolling over his equity with another buyer. Those statements conveyed that Berry was open-minded about potential purchasers other than Apollo.

But the Board minutes showed that, when asked whether he would roll over equity with a buyer other than Apollo, Berry said he did not know of another private-equity buyer with food-retail experience with whom he would be comfortable doing so. The November 28 email likewise said Berry would consider another rollover only if he had confidence in the buyer’s ability to oversee the company, while also asserting that Apollo was uniquely qualified because of its experience with Sprouts.

These omitted qualifications could support a reasonable inference that, as a practical matter, Berry would roll over only with Apollo. A reasonable stockholder could view that preference as important because it may have limited competition, impaired the openness of the sale process, and increased Apollo’s bidding advantage. The directors could not disclose Berry’s nominal willingness to consider other bidders while withholding facts that materially qualified that willingness.

Berry’s counsel told company counsel that Berry believed the Board should pursue a sale because of the company’s low valuation and the difficulty of executing operational changes under public-market scrutiny. Counsel also said that, if the company remained public, Berry would give serious consideration to selling his shares because he believed the company was not positioned to prosper as a public company.

The Court did not adopt Morrison’s characterization of this statement as a threat. But it was an economically significant statement of Berry’s intentions and his rationale for advocating a sale. It revealed the founder’s view of the company’s prospects, his reasons for favoring a transaction at that time, and the possibility that he might dispose of his substantial stake absent a sale.

The Court of Chancery erred by asking whether the disclosure would have made investors less likely to tender. The materiality inquiry is broader: whether a reasonable stockholder would consider the information important in deliberating over tendering or seeking appraisal. Berry’s stated view and intended course of action met that standard at the pleading stage.

The 14D-9 said the Board formed the Committee for efficiency because the company could become subject to stockholder pressure, communications, and additional unsolicited proposals following poor stock performance. This wording portrayed stockholder pressure as a future possibility rather than an existing condition.

The Board minutes showed that the directors had already discussed significant recent stockholder outreach regarding the company’s strategy. In particular, they considered a letter from activist investor Neuberger Berman, which criticized the company’s performance and urged an immediate strategic review that included considering a sale, partnerships, or other alternatives.

The difference between possible future pressure and substantial pressure already confronting the Board was not merely semantic. It bore on why the Board created the Committee and initiated the strategic process. Because the company chose to discuss the reason for forming the Committee, stockholders were entitled to an accurate account of the depth and timing of the activist pressure.