Delaware Court of Chancery. Courtesy photo

Scott Duggan, former general counsel and senior vice president of The Fresh Market Inc., has failed to convince a judge to dismiss a breach of fiduciary duty claim he faces for his role in the publicly traded grocery chain's $1.36 billion buyout.

Delaware's Chancery Court found in a Dec. 31 decision that the allegations in a shareholder lawsuit could "conceivably support" a claim that Duggan was grossly negligent when he drafted and certified a filing with the U.S. Securities and Exchange Commission in connection with Fresh Market's sale to private equity firm Apollo Global Management. 

According to the court, the schedule 14D-9 filing in question—Fresh Market's response to Apollo's takeover bid—omitted the following key pieces of information: 

• Fresh Market former chairman and CEO Ray Berry lied to the company's board about having reached a behind-the-scenes agreement with Apollo before the 2016 merger.
• Berry had expressed a "clear preference" for Apollo and was unwilling to consider offers from other firms.
• Berry indicated he might sell his shares in the company if it did not pursue the sale with Apollo. 
• The "depth and breadth" of shareholder pressure to sell. 

Vice chancellor Sam Glasscock noted in the opinion that the Delaware Supreme Court already held that the SEC filing "presents a distorted narrative." He wrote that based on Duggan's "role as general counsel, and given the sales process as pled, I can infer that the omitted facts were omitted with his knowledge. 

"It is reasonably conceivable that crafting such a narrative to stockholders, while possessed of the information evincing its inadequacy, represents gross negligence on Duggan's part," he added. 

"Of course, another reasonable interpretation is that the 14D-9 represents a good faith but failed effort to make reasonable disclosures," he wrote, "but given the pleading stage, I must choose the inference favoring the plaintiff." 

An attorney for the shareholder class, Joel Friedlander of Friedlander & Gorris in Wilmington, Delaware, declined to comment on the decision. Attempts to reach Duggan and his attorneys at Wilson Sonsini Goodrich & Rosati, also in Wilmington, were unsuccessful. 

While Glasscock denied Duggan's motion to dismiss, he also rejected the shareholders' claim that Duggan was motivated to complete the "sham sale" to Apollo because he stood to receive $1.2 million in single-trigger equity-based compensation and another $1.1 million if he were terminated after the merger. 

"The fact that Duggan remained with the company following the transaction suggests his double-trigger compensation was not a motive," Glasscock wrote. 

Glassock also cast aside an argument that Duggan breached his fiduciary duty by failing to sufficiently question Berry about his relationship with Apollo. 

"It may have been wise to explore further. Failure to do so may have been poor lawyering," Glasscock wrote. "Given the circumstances and inquiries Duggan made, however, I do not find the plaintiff has pleaded facts supporting gross negligence. Prompted by Apollo's offer, Duggan investigated, received Berry's account, reported it to the Board, and Berry confirmed it."

Duggan parted ways with the Greensboro, North Carolina-based Fresh Market in March 2019 and joined Carter's Inc. in Atlanta, where he serves as senior vice president of corporate and legal affairs, general counsel and corporate secretary for the children's clothing company, according to his LinkedIn profile.