(Reuters) - Plaintiffs' lawyers from Friedlander & Gorris and Robbins Geller Rudman & Dowd have accused Cravath Swaine & Moore of aiding and abetting an alleged breach of duty by board members of the Fresh Market, which was acquired by the private equity fund Apollo for $1.4 billion in 2016. Shareholders leveled their accusations against Cravath in an amended class action complaint filed last week in Delaware Chancery Court.
The suit, which was first reported by the Financial Times, claims that the preeminent law firm helped Fresh Market’s board run a tainted sale process with a predetermined outcome. The complaint also alleges that Cravath and Fresh Market’s then general counsel orchestrated after-the-fact justifications for the board’s decision to accept a lowball offer from Apollo; and that Cravath drafted a proxy statement that materially misled shareholders about the transaction.
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Cravath presiding partner Faiza Saeed did not respond to my phone and email requests for comment on the allegations in the new complaint, which follows the Delaware Supreme Court's 2018 revival of a suit against Fresh Market's board members. A Fresh Market spokeswoman said former Fresh Market GC Scott Duggan declined to comment. The spokeswoman also said the company believes the claims in the amended complaint are "without merit."
It’s a big deal for shareholders to allege misconduct by lawyers for a corporate board, though it’s happened in at least three recent cases. In 2016, Wilson Sonsini Goodrich & Rosati agreed to settle aiding and abetting claims in a $35 million case involving its former client Occam Networks. In 2017, Paul Hastings put up an unprecedented $46.5 million to resolve allegations that it helped the ExamWorks board to shirk its duty to shareholders. That same year, Paul Hastings was also named as a defendant in a $10 million case against the board of the Providence Service Corporation.
But it’s still very rare for law firms to be called out for aiding and abetting – so rare that there is apparently no precedent from the Delaware Supreme Court, or even Chancery Court, to illuminate the line between zealous advocacy for corporate board members and liability to shareholders. None of the three cases I mentioned went to trial, although at a hearing on the proposed settlement in the ExamWorks case, Vice-Chancellor Travis Laster implied his endorsement of the theory that lawyers can be liable for abetting a board’s breach, calling shareholders’ claims against Paul Hastings “disturbingly” strong.
With that context, let’s break down the allegations against Cravath, beginning with its alleged motivation. Why would Cravath compromise its integrity in a relatively small deal for a relatively small client? For premium fees, according to the shareholder complaint. The firm was paid a premium fee of about $5.5 million for its work on the deal, according to the complaint, which does not specify how much of that fee was a contigent upon completion of the Apollo deal. In an accompanying exhibit, Fresh Market’s then general counsel Duggan said that if the deal had gone bust before the acquisition was announced, Cravath “would have charged very little for their incurred fees.”
For Cravath, which grossed more than $700 million in 2016 according to the Am Law 100, $5.5 million would be a pretty paltry price for firm’s good name. But Fresh Market shareholders claim Cravath also had reputational reasons to help board members push through the Apollo deal. “The closing of a sale transaction to Apollo would accomplish the objective of Cravath’s director and officer clients — extracting them from a difficult situation without raising the ire of stockholder activists — and it would serve the interests of powerful repeat players, JP Morgan and Apollo,” the complaint claimed. “Cravath’s task was to lend a patina of integrity to a sham auction.”
The complaint’s first allegations against Cravath stem from that allegedly tainted sale process. In a nutshell, the suit contends that Cravath helped the board create the appearance of a fair and transparent sale while working behind the scenes to assure that Apollo would prevail.
As the complaint explains, Apollo had a side deal with Fresh Market’s founder and his son, who owned nearly 10 percent of the company’s shares. The private equity fund first approached Ray and Brett Berry in July 2015, when Fresh Market was searching for a new CEO and the company’s shares were in doldrums, down nearly 50 percent in six months. By September, Apollo had reached an informal deal with the Berrys in which they agreed to roll over the family’s 9.8 percent stake if Apollo bought out the company.
For Apollo, the Berry rollover meant the fund would have to expend less capital to take Fresh Market private. For the Berrys, who believed Apollo had the expertise to run the company, the estimated upside from an Apollo takeover was as much as $930 million.
As Apollo and the Berrys worked out their plans, Fresh Market brought in a new CEO, who developed a strategic plan to right the company. But activist shareholders were growing restless – and a different private equity fund had approached one of the company’s outside directors about a buyout. Finally, on October 1, Apollo submitted an offer to take the company private at $30 per share, disclosing that it was working with the Berrys “in an exclusive partnership.”
The board knew that the Berrys’ alliance with Apollo would deter other bidders. But rather than confronting the Berrys and Apollo, according to the shareholder complaint, Fresh Market’s GC and the board’s outside counsel from Cravath simply worked to create the appearance of a level playing field. The lawyers, according to the complaint, “choreographed” questions and answers for Raymond Berry to present to the board to make it seem as though he was open to cooperating with bidders other than Apollo.
“The board indulged the fiction that the Berrys could be persuaded to work against their own self-interest as prospective buyers with Apollo and might work with other potential private equity bidders,” the complaint claimed. “At every step, the board proceeded along a choreographed, sham strategic review and sale process in which the board propagated the fiction that Apollo and the Berrys were not in fact co-bidders with a decisive advantage over other potential suitors.”
The only specific accusation linking Cravath with the allegedly “sham” sale process is the complaint’s claim that the law firm asked Berry a pre-arranged question about his Apollo ties at a crucial board meeting in October. And it’s not much of a stretch to imagine the law firm arguing that its question to Berry was a model of diligence, since Berry’s answer put him on the record with a commitment (albeit a very squishy one) to listen to offers from other buyers.
But shareholders also claim that toward the end of the sale process, when it was clear that Apollo would be the only bidder, Cravath worked with Fresh Market’s GC to justify a lowball bid from the PE fund. In the course of bidding for the company, Apollo, allegedly with the help of inside information from Fresh Market’s bankers at JPMorgan Chase, stepped back from its initial offer of $30 per share, ultimately bidding just $28.50 per share. (JPMorgan is named alongside Cravath in the new amended shareholder suit as an aiding and abetting defendant; a company spokesperson declined to comment on the newly filed allegations.)
Apollo’s bid would presumably look unappealing in comparison to projections from Fresh Market’s new management, which had just come up with strategic plans that put the value of company in the much rosier range of $33.75 to $42.25.
So according to the complaint, Cravath and the company’s GC engaged in “a lawyer-driven exercise … to create downwardly adjusted (projections)” to make Apollo’s offer seem more appealing to directors and, eventually, shareholders. The lawyers allegedly convened a special meeting in March with bankers from JPMorgan and just two Fresh Market directors. Much of the complaint’s discussion of what happened at that hour-long meeting is redacted, but shareholders’ implication is that the board’s lawyers wanted JPMorgan to run additional financial scenarios to give board members cover for backing a bid that significantly undercut management’s projections. (The complaint additionally claims that the minutes of the specially-convened meeting are false.)
Finally, according to the complaint, Cravath drafted a deceptive proxy statement that “was devoted to the false proposition that the Berrys were open-minded about the outcome of the sale process.” Fresh Market’s securities filing, according to shareholders, “conceals how the Berrys and Apollo worked together throughout the sale process pursuant to an oral rollover agreement, how the outcome of the sale process was foreordained, and how the additional scenario analyses were created to accommodate a sole bidder that the board had been unwilling to confront.”
The Delaware Supreme Court has already cast doubt on the legitimacy of the Fresh Market’s proxy statement. In 2018, the state justices reversed(191 A.3d 268) Chancery Court’s dismissal of shareholders’ original case against the Fresh Market board, holding that the investors had adequately alleged that the proxy filing omitted “troubling facts,” such as the Berrys’ original side deal with Apollo. Among the disclosure failures highlighted by the Supreme Court is the proxy statement’s omission of Cravath’s question to Ray Berry at that crucial board meeting in October 2015.
Shareholders assert that the allegedly misleading proxy statement was the culmination of directors’ betrayal of their duties - and Cravath’s abetting of that betrayal. “Cravath knowingly participated with (general counsel) Duggan and the director defendants in misleading first the board and then Fresh Market stockholders about Ray Berry’s interactions with and commitment to Apollo, and in causing the creation of fabricated ‘sensitivities’ to management’s projections for the purpose of justifying the inadequate acquisition price,” the complaint claims.
As I said, there’s scant Delaware law on aiding and abetting liability for lawyers who represented boards accused of breaching the duty to shareholders. I suspect Cravath will argue that it did no more than help Fresh Market maximize the company’s value in the face of shareholder activism, an uncertain future as a standalone and tepid interest from buyout funds.
Every deal lawyer should be watching to see what happens.
The views expressed in this article are not those of Reuters News.