On June 1, the Delaware Chancery Court (the “Court”) in Morrison v. Berry  allowed an aiding and abetting breach of fiduciary claim to proceed against financial advisor J.P. Morgan Securities, LLC (“JPMorgan”) for its role in the 2016 merger/takeover of grocery store chain The Fresh Market, Inc. (“Fresh Market”) by a group of Apollo entities (“Apollo”), while dismissing aiding and abetting claims against Fresh Market’s law firm and Apollo.  The Court’s decision on whether to grant each motion to dismiss hinged on whether the third party defendant “knowingly” participated in the Fresh Market board’s breach of its fiduciary duties by misleading the board or creating an information vacuum.

Under the doctrine outlined by the Delaware Supreme Court in Corwin v. KKR Financial Holdings LLC,[1] a disinterested stockholder vote can often “cleanse” alleged breaches of fiduciary duty if it is fully informed and uncoerced.  In other words, a transaction that is voted on by a fully informed, uncoerced majority of disinterested stockholders can result in the business judgment rule applying rather than the more exacting standards outlined in Revlon.[2]  If disclosures to stockholders omit material information or are materially misleading, then the benefits afforded by Corwin will not apply, and as is demonstrated below, this can result in protracted litigation extending not just to directors but also to claims against advisors under aiding and abetting theories.

Of interest, the Court found that an advisor can be liable for aiding and abetting a breach of fiduciary duties without reference to the culpability of the individual directors if the advisor was conflicted and prevented the board from conducting a reasonable sales process in violation of the standard imposed on the board under Revlon. Consistent with this standard, the Court stated that “[t]he advisor is not absolved from liability simply because its client’s actions were taken in good-faith reliance on misleading and incomplete advice tainted by the advisor’s own knowing disloyalty.”

Factual Background

In July 2015, a partner at Apollo named Andrew Jhawar (“Jhawar”) approached Fresh Market’s minority shareholder and chairman of the board Ray Berry (“Berry”) about taking Fresh Market private.  Berry and Jhawar exchanged emails, and Berry’s son and Jhawar discussed potential transaction structures, including an equity rollover of Berry and his son’s Fresh Market stock.  Berry did not disclose these discussions to the other Fresh Market board members.

On October 1, 2015, Apollo submitted a proposal to acquire Fresh Market at $30 per share that included an equity rollover of the Berrys’ shares and would have increased the Berrys’ ownership from approximately 9.4% pre-deal to almost 28.3% post-deal.  Key facts are summarized as follows:

  • The board met on October 15 to discuss the Apollo proposal, and Berry denied having an agreement with Apollo concerning the rollover of his and his son’s equity. A director conveyed that in a letter to Apollo, and Apollo withdrew its bid.  On November 25, Fresh Market’s legal counsel, Cravath, Swain & Moore LLP (“Cravath”), spoke to Berry’s counsel concerning the issue, was subsequently provided with an email acknowledging that Berry an oral agreement with Apollo to roll over his shares if its bid was successful.
  • Communications around this time, also not shared with the board, demonstrated Apollo’s ongoing relationship with the Berrys, including shared comments on draft financial models, and led to Apollo renewing its acquisition offer at $30 per share on November 25.
  • The board retained JPMorgan as its financial advisor, and JPMorgan contacted 32 potential bidders, resulting in several indications of interest but only one firm bid – from Apollo at $27.25 per share.
  • Apollo signed a confidentiality agreement on December 9 in which it agreed not to initiate or maintain contact with directors of Fresh Market without permission. Despite that, short emails between Berry and Jhawar occurred and an email from Jhawar’s assistant reminded him to call Berry, indicating that there may have been additional contact.
  • JPMorgan was a significant client of Apollo’s, having been paid over $116 million in fees in the preceding 2 years. During the sales process, Apollo’s “client executive” at JPMorgan provided inside information about the bid process to Apollo and championed Apollo behind the scenes. JPMorgan provided the board with a conflicts disclosure that represented that the senior deal team members assigned to the Fresh Market sale were not “currently providing services” to Apollo or members of Apollo’s coverage team.  JPMorgan did not disclose its communications with Apollo’s Jhawar.
  • The board rejected Apollo’s $27.25 bid, and in response, Apollo submitted a “best and final” offer of $28.50 per share, which the board accepted.
  • Fresh Market filed its Schedule 14D-9 and Apollo filed its Schedule TO with the U.S. Securities and Exchange Commission. The filings did not disclose the months of communications between Jhawar and Berry or how Berry had advocated for Apollo as the desired acquirer of Fresh Market.

Aiding and Abetting Breach of Fiduciary Duties

All defendants moved to dismiss the complaint, and the claims against the board members (other than Berry) for breach of fiduciary duty were dismissed based on an exculpation provision in Fresh Market’s bylaws. The Court noted that the elements of a claim of aiding and abetting a breach of fiduciary duty are (1) breach of fiduciary duty and (2) the third party knowingly participating in facilitating that breach. The Court noted that an advisor that withholds information that results in a board failing to comply with its Revlon duties may be liable for aiding and abetting the board’s breach of fiduciary duty even where, as here, the directors were not liable due to the exculpation provision.[3]

JPMorgan’s Motion to Dismiss

The Court found that the first element of an aiding and abetting claim – breach of fiduciary duty – could be reasonably inferred from the pleadings.  Although not bad faith, the Court found that the board’s failure to comprehend JPMorgan’s conflict of interest with Apollo, the sole bidder, conceivably breached duties imposed in the Revlon context.  In support of this, the Court noted that the board did not ask whether any members of the Apollo coverage team were acting as go-between for Apollo and the Fresh Market deal team. The Court found that the second element of an aiding and abetting claim – knowingly participating in facilitating that breach – could also be reasonably inferred from the pleadings.  The Court found that JPMorgan had crafted the conflicts disclosure in a manner that gave the Fresh Market board the impression that JPMorgan’s Apollo coverage team was distinct from its Fresh Market M&A team when, in fact, JPMorgan and Apollo were using a senior JPMorgan team member as an intermediary to channel confidential information to Apollo that arguably gave it an edge in the sales process.  The Court noted that Apollo may have “gained insight and favorable treatment” from JPMorgan to use to its advantage. The Court further found it plausible that had JPMorgan disclosed its interactions with Apollo, the stockholders may not have approved the transaction.  Based on the above, the Court denied JPMorgan’s motion to dismiss.

Cravath’s Motion to Dismiss

The plaintiff’s allegations were that Cravath intentionally and knowingly caused the board to carelessly draft and release a 14D-9 omitting material facts in breach of its duty of care. Plaintiff alleged that Cravath intentionally engineered a misleading 14D-9 to evade potential objections from stockholders and collect its transaction fee of $5.5 million, payable only if the transaction closed.  The Court rejected this and noted (1) the Court had found that the directors did not breach the duty of loyalty and only conceivably breached the duty of care, (2) a contingent fee is unremarkable and applies to virtually any outside counsel in a mergers and acquisitions scenario and (3) allowing an inference of scienter to stand with a mere allegation of contingency fee demonstrating scienter, in addition to being unreasonable, would work much mischief in the ability of a board to have competent advice from legal advisors.  Of interest, the Court found that there was no proof that Cravath knowingly concealed that information because even if Cravath could have discovered some of the facts of the relationship between the Berrys and Jhawar through diligence, the pleadings failed to show that Cravath intentionally hid the connection between them.

Apollo’s Motion to Dismiss

The Court dismissed the aiding and abetting claim against Apollo, finding that Apollo was forthcoming with Fresh Market’s board about its relationship with the Berrys. In every communication made to the board, Apollo referenced its partnership with the Berry family and the intended rollover of the Berry family’s stock. There was no allegation that Apollo had reason to believe Berry was hiding anything from the board.

[1] 125 A.3d 304 (Del. 2015).

[2] Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 (Del. 1986).

[3] RBC Capital Markets, LLC v. Jervis, 129 A.3d 816 (Del. 2015). In this case, the Delaware Supreme Court held that an advisor who creates an “informational vacuum” that results in the board failing to satisfy its Revlon duties may be liable for aiding and abetting.

Photo of Nancy B. Bostic Nancy B. Bostic

Nancy Bostic is the Practice Group Leader for Mergers and Acquisitions and Private Equity and also serves on Gray Reed’s CARES Act Task Force.

Photo of Amy E. Lott Amy E. Lott

With clients ranging from corporations, partnerships and entrepreneurs to family offices, investment companies and individual investors, Amy Lott focuses her practice on structuring a wide variety of transactions, including stock and asset acquisitions, mergers, private placements, joint ventures and financings.

Photo of Cindy M. Pridgen Cindy M. Pridgen

Cindy assists domestic and international companies, small businesses and high-net-worth individuals with a wide variety of tax and governance matters, including maximizing tax efficiency in commercial and private equity transactions, entity structuring, tax planning, resolving federal and state tax controversies and advising on…

Cindy assists domestic and international companies, small businesses and high-net-worth individuals with a wide variety of tax and governance matters, including maximizing tax efficiency in commercial and private equity transactions, entity structuring, tax planning, resolving federal and state tax controversies and advising on day-to-day tax and business issues.