## Facts

- The Earthgrains Company, a Delaware corporation, had many shareholders holding fewer than 100 shares, allegedly deterred from trading by transaction costs and inconvenience.
- Margaret Alessi, a small shareholder, owned fewer than 100 shares.
- On May 18, 2001, Earthgrains announced a company-sponsored program allowing holders of fewer than 100 shares to buy or sell at current market price (about $25) for a reduced brokerage fee.
- Alessi sold her shares through the program.
- Shortly thereafter, Earthgrains announced that Sara Lee Corporation agreed to acquire Earthgrains at a price nearly double what Alessi received.
- Alessi alleged that, when Earthgrains announced and ran the small-shareholder program, Earthgrains was already engaged in intense acquisition negotiations with Sara Lee.
- Alessi alleged the negotiations were material to a reasonable shareholder deciding whether to sell under the program and that directors and the CEO breached fiduciary duties by omitting that information.

## Issues

1. Whether the complaint stated a claim that directors and the CEO breached fiduciary disclosure duties by not disclosing ongoing acquisition negotiations in connection with a company-initiated small-shareholder buy/sell program.
2. Whether the court could hold, at the pleading stage, that the alleged merger negotiations were immaterial as a matter of law, including under defendants’ reliance on Bershad.

## Decision

- The Court of Chancery denied defendants’ Rule 12(b)(6) motion to dismiss.
- The court held the complaint adequately pleaded a viable disclosure-violation claim.
- The court declined to rule, as a matter of law on the pleadings, that the alleged merger negotiations were immaterial.

## Legal Principles

- Directors’ disclosure obligations are a specific application of fiduciary duties; when directors solicit or seek shareholder action, they must disclose fully and fairly all material information and avoid materially misleading omissions.
- Information is material if there is a substantial likelihood that a reasonable shareholder would view it as important in deciding how to act (including whether to sell).
- Materiality of merger negotiations depends on context, including the level of interest and how far negotiations have progressed; purely casual or preliminary inquiries may be immaterial, but more developed negotiations may require disclosure.
- Materiality commonly presents a mixed law-and-fact question that is often unsuitable for resolution on a motion to dismiss when the complaint plausibly alleges advanced negotiations.
- At the pleading stage, allegations that nondisclosure induced a sale at a lower price, causing economic harm, may suffice to plead causation and damages.

## Conclusion

The court allowed the action to proceed because the complaint plausibly alleged that Earthgrains solicited small shareholders to trade while omitting allegedly intense and advanced acquisition negotiations that a reasonable shareholder could find important in deciding whether to sell.


Alessi v. Beracha, 849 A.2d 939 (Del. Ch. 2004)