Do you remember Cede v. Technicolor? Litigation involving Technicolor’s 1983 going private deal dragged on for over 20 years, and made five trips to the Delaware Supreme Court. I don’t know if Morrison v. Berry — the litigation over Apollo’s 2016 acquisition of The Fresh Market grocery store chain — will ultimately challenge Technicolor’s longevity, but it’s off to a solid start.
The case has already made one trip to the Delaware Supreme Court, where the Court overruled the Chancery Court’s decision that the case satisfied Corwin and should be subject to business judgment review. Subsequent to that decision, the Chancery Court refused to dismiss disclosure-based fiduciary duty claims against the company’s General Counsel and, most recently, upheld aiding and abetting claims against its financial advisor. This excerpt from a recent Morris James blog summarizes the Chancery Court’s most recent decision:
The Apollo group of equity investors sought to acquire the Fresh Market grocery store chain in a going-private transaction in conjunction with other large equity holders. Fresh Market relied on its financial advisor, J.P. Morgan, which during its negotiations with Apollo generated downward adjustments to management projections and adjustments to its discounted cash flow analysis that resulted in a lower valuation range for Fresh Market.
Apollo had paid J.P. Morgan $116 million in fees in the two years preceding the transaction. Throughout the sales process, Apollo allegedly communicated with its “client executive” at J.P. Morgan to solicit inside information about the bid process and negotiating dynamics. J.P. Morgan’s conflict of interest disclosures to Fresh Market’s board of directors indicated its “senior deal team members” were not currently “providing services” for the members of J.P. Morgan’s Apollo coverage team.
The Court agreed with the plaintiffs that one could reasonably infer this disclosure was “artfully drafted” to omit the backchannel communications with Apollo. The Court found it reasonably inferable that Apollo outlasted other potential buyers and was able to acquire Fresh Market due to J.P. Morgan’s assistance.
One of the interesting things about this decision is that the Court had previously dismissed breach of fiduciary duty allegations against the company’s directors because the plaintiffs didn’t raise any non-exculpated claims. Citing the Rural/Metro decision, the Court said that where a conflicted financial advisor allegedly prevented the board from conducting a reasonable process, it may be liable for aiding and abetting that breach, even if the directors are not:
Where a conflicted advisor has prevented the board from conducting a reasonable sales process, in violation of the standard imposed on the board under Revlon, the advisor can be liable for aiding and abetting that breach without reference to the culpability of the individual directors. Consistent with this standard, “[t]he advisor is not absolved from liability simply because its clients’ actions were taken in good-faith reliance on misleading and incomplete advice tainted by the advisor’s own knowing disloyalty.”
The Court of Chancery thus held that at the pleadings stage, the plaintiff’s aiding-and-abetting claim against J.P. Morgan was legally sufficient.
-John Jenkins, DealLawyers.com July 29, 2020