The Importance of Full Disclosure

Directors and officers of corporations owe a duty of care and a duty of loyalty to both the corporation and its shareholders, although the duty of care for directors can be exculpated.  A breach of these fiduciary duties can expose such directors and officers to liability.  In Morrison v. Berry, No. 12808-VCG, 2019 Del. Ch. LEXIS 1412 (Ch. Dec. 31, 2019), a recent decision published by the Delaware Chancery Court, Vice Chancellor Glasscock granted motions to dismiss against the majority of the directors of Fresh Market, Inc., finding there was no breach of loyalty by these directors in connection with a sale of the company to a private equity firm, and noted that the duty of care was exculpated. Vice Chancellor Glasscock denied motions to dismiss against Fresh Market’s (i) founder Ray Berry (who was a director) for his misdirection and lack of candor prior to and during the sale process; (ii) chief executive officer Richard Anicetti (who was both a director and an officer) for his grossly negligent preparation of the Form 14D-9; and (iii) general counsel Scott Duggan (who was an officer) for his grossly negligent preparation of the Form 14D-9, all of which amounted to breaches of fiduciary duty.

The claims for breach of fiduciary duty, initially filed under Morrison v. Berry against only the directors of Fresh Market, were dismissed in September 2017 by Vice Chancellor Glasscock, who found that, given the vote of disinterested shareholders approving the merger, the highly deferential business judgment rule applied and cleansed any breaches of fiduciary duty by the directors. This decision was reversed and remanded by the Supreme Court of Delaware in July 2018; the court noted that the business judgment rule did not apply since the shareholders were not fully informed in their vote. On remand, and after the complaint was amended to add claims of breach of fiduciary duty against Anicetti (as an officer) and Duggan, Vice Chancellor Glasscock found that the majority of directors had not breached their fiduciary duties and dismissed the claims against them. As to Berry, Anicetti, and Duggan, however, the motions to dismiss were denied.

Vice Chancellor Glasscock specifically highlighted that the Form 14D-9 regarding a founder-sponsor-led going private deal provided by Fresh Market was substantially lacking given its material omission of: (i) the lack of candor by Berry regarding his agreement with the buyer, a private equity firm; (ii) Berry’s statements suggesting his preference for that particular private equity firm (Apollo) and his unwillingness to consider participating with other parties; (iii) Berry’s indication he would sell his shares if the company did not sell to Apollo; and (iv) the depth and breadth of the shareholder pressure to sell. While the claims against the majority of the directors of Fresh Market were dismissed, Vice Chancellor Glasscock found enough evidence of breach of fiduciary duty by Berry, Anicetti and Duggan to allow the claims against them to proceed. His decision noted that Berry had breached his duty of loyalty (his duty of care having been exculpated) for his deceptive actions towards the board, and Anicetti and Duggan had breached their duty of care (but not their duty of loyalty) for their grossly negligent preparation of the Form 14D-9 (as officers, their duty of care was not exculpated). Vice Chancellor Glasscock further stated that both Anicetti and Duggan had sufficient information and knowledge of the omissions to understand that such Form 14D-9 was materially inadequate and misleading to Fresh Market’s shareholders. Ultimately, the denial of the motion to dismiss the claims of breach of fiduciary duty against these three individuals, who are, respectively, a director, an officer and a director, and an officer, demonstrates the limits of the statutory protection afforded to company officers in Delaware.

Morrison v. Berry provides a stark reminder to attorneys and other individuals who prepare filings on behalf of companies to ensure the information contained in such filing is complete and accurate to avoid potential liability. Though there can be competing interests by the company, its board and its officers to limit certain disclosures to avoid an exposure of the analysis and actions that led to a decision, material events and actions, even those deemed unpleasant, require full candor to ensure shareholders are fully informed and those preparing the filing avoid potential liability.  The case also reminds us that officers do not have any fiduciary duty exculpations, even if they are also directors.  A director might be able to avoid the duty of care; an officer cannot.