Attorneys reflect on Delaware court’s backing of Market Basket CEO firing

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In brief

• Delaware Chancery Court upheld Market Basket board’s termination of CEO Arthur T. Demoulas
• Court emphasized strength of the business judgment rule limiting judicial review
• Directors’ concerns included lack of cooperation, resistance to oversight, and governance issues
• Demoulas failed to prove bad faith or breach of fiduciary duty by the board

What lessons should boards of directors and their counsel take from the recent blow the Delaware Court of Chancery dealt former Market Basket magnate Arthur T. Demoulas?

“Even when you have a CEO who is a pretty good operator of a business, there’s a whole lot more that goes into being a good CEO, and the board can and should evaluate that,” says Boston’s Aliki Sofis, part of a Quinn, Emanuel, Urquhart & Sullivan team that helped the three members of the Demoulas Super Markets board rebuff the claims of “Artie T” that they breached their duty of loyalty by acting in bad faith to benefit Demoulas’ sisters and their families.

“Here, the three directors rationally concluded — one could say reasonably or fairly concluded — that the CEO’s longstanding resistance to board oversight, imperious manner, and refusal to compromise with his sisters threatened the company,” Vice Chancellor J. Travis Laster wrote in his 125-page post-trial opinion.

While he called the ruling “disappointing,” McDermott, Will & Schulte partner Andrew C. Liazos says he and the rest of Arthur Demoulas’ legal team knew they were fighting an uphill battle given that the board members had the benefit of the business judgment rule, severely limiting the court’s review of the board’s decision to first suspend and then terminate Demoulas as CEO.

“[T]he court merely looks to see whether the business decision made was rational in the sense of being one logical approach to advancing the corporation’s objectives,” Laster wrote. “The business judgment rule thus provides ‘something as close to non-review as our law contemplates.’”

Liazos also notes the summary nature of the Chancery Court’s Section 225 proceeding.

“The matter was truncated, and it was done with very limited discovery over a very short period of time,” Liazos says.

Full discovery might have included the depositions of individuals whose testimony would have been helpful to have, he adds.

The Chancery Court always faces a challenge when asked to determine whether directors acted in “bad faith,” which is a state of mind, Laster noted.

“The state of a man’s mind is as much a fact as the state of his digestion,” Laster wrote. “As mortals, the members of the Court of Chancery ‘cannot peer into the hearts and souls of directors to determine their subjective intent with certainty.’”

Sofis agrees that the process was “extremely expedited,” with about a dozen depositions conducted in just over two months between when the directors filed their complaint to confirm that they properly terminated Demoulas and the start of the trial.

Despite the time constraints, the directors’ legal team decided to go on offense and put forward a “full-blown narrative” about what had caused the relationship between Demoulas and the board of directors to deteriorate. Part of that narrative was to show that the three directors came onto the board at separate times and brought diverse backgrounds to their service but reached similar conclusions.

“They had a CEO who refused to communicate with them outside of the boardroom,” Sofis says.

An Aug. 8, 2024, “alignment meeting” helped the directors reduce their shared concerns to an “issues list” with five items, which they presented to Demoulas a couple of weeks later, though the parties’ recollections differed as to whether they were presented as mandates or proposals for discussion, Laster noted.

Among the things Demoulas was asked to do was provide annual and quarterly forward-looking budgets, present capital expenditure projects over $10 million for board approval before making any commitments, and bring the heads of key business areas to board meetings rather than attend solo, as had been his practice.

A fourth item addressed lingering hard feelings from Demoulas’ previous firing and return to the company a decade earlier, which included a weeks-long, highly public employee walkout and customer boycott that Demoulas had led. The board was now insisting that the company not celebrate that 2014 revolt, which one of the board members had learned Demoulas was planning to do.

The board also wanted Demoulas to pledge his help to find a qualified individual to be his successor rather than have his children take over.

But Demoulas “failed to make any meaningful effort” on the issues list, Laster found.

“Rather than being constructive, he hunkered down in a passive-aggressive stance,” Laster wrote.

The first sign that Demoulas would not be responding the way the board had hoped was that he allowed a PR blitz centering on the 2014 walkout and boycott to go on as he had planned.

“By allowing the publicity campaign to proceed, Arthur thumbed his nose at the Board over the No Celebration Issue,” Laster wrote.

The directors then learned just minutes before Demoulas announced publicly that the company had purchased a new site in Scarborough, Maine, which violated the spirit if not the letter of their request to know about capital expenditures ahead of time.

Things came to a head when the board discovered Demoulas seemed to be marshaling his forces within the employee ranks to stage another walkout, which included Demoulas — without the board’s knowledge — paying employees bonuses of $15 million cumulatively “in recognition of the events of 2014 and to thank them for their support.”

Soon thereafter came Demoulas’ suspension and an investigation commissioned by Quinn Emanuel led by former acting U.S. Attorney William D. Weinreb and Stephen E. Frank, a former assistant U.S. attorney in Massachusetts and the Eastern District of New York.

Demoulas “struck back with a public relations campaign of his own,” which included social media posts and media appearances suggesting that Demoulas’ sisters had orchestrated Arthur’s removal.

Weinreb and Frank’s 36-page investigative report, which Laster noted Demoulas and his attorneys never disputed, concluded that Demoulas “refused to take basic steps to comply with reasonable Board requests.”

After an unsuccessful attempt at mediation, the directors voted unanimously last September to terminate Demoulas as president and CEO, without cause, effective immediately.

Laster said he intended to enter judgment determining that Demoulas’ removal as president and CEO was valid. He gave the parties five days to confer and try to submit jointly a final agreed-upon order. However, when that failed, the parties on April 27 submitted a joint letter presenting competing forms of the order and detailing their disagreements.

Liazos says Demoulas’ team would evaluate their options for next steps once they see the final version of Laster’s order.

But Market Basket counsel Harvey J. Wolkoff hopes the grocery chain might finally be able to close this chapter of its history.

“The Court’s comprehensive and thoughtful decision allows Market Basket to move forward as the preeminent grocery business in New England, serving customers and associates as a family-owned business well into the future,” he says in an emailed statement.