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Singh v. Attenborough, C.A. No. 645, 2015 (Del. May 6, 2016) (Strine, CJ)

May 6, 2016

In this order, the Delaware Supreme Court affirmed the principle that a fully informed, uncoerced vote of disinterested stockholders entitles a challenged transaction to the protections of the business judgment rule and clarified that an aiding and abetting claim against a board advisor requires that advisor to have acted with knowledge rather than mere recklessness.

Below, the Court of Chancery dismissed plaintiffs’ breach of fiduciary duty and aiding and abetting claims for failure to state a claim. As to the breach claims, the Court of Chancery determined that the business judgment rule shielded the challenged transaction, a merger, because fully informed, uncoerced, and disinterested stockholders had approved it.  After reaching this conclusion, the Court of Chancery then considered whether plaintiffs had stated a claim for breach of the duty of care by pleading gross negligence and concluded they had not.  As to the aiding and abetting claim, the Court of Chancery dismissed the claim after concluding that the plaintiffs had failed to plead an underlying breach.

On appeal, the Delaware Supreme Court affirmed both dismissals. As to the breach claim, it agreed that the fully informed, uncoerced, and disinterested vote of stockholders invoked the business judgment rule.  However, it disagreed with and characterized as erroneous the lower court’s decision to consider whether plaintiffs had stated a breach of the duty of care by pleading gross negligence because that provided no standard-shifting effect to the stockholder vote.  It explained that the typical result when presented with such a vote is dismissal, identified waste claims as an exception, but cautioned that even a claim for waste would likely result in dismissal because stockholders are unlikely to approve a wasteful transaction.  As to the aiding and abetting claim, the Supreme Court agreed with the lower court’s conclusion that the claim should be dismissed but distanced itself from that court’s reasoning on two accounts.  First, the Supreme Court found erroneous any suggestion that a board advisor cannot be held liable for aiding and abetting a breach of the duty of care when a 102(b)(7) charter provision exculpates the fiduciary from liability for that breach.  Second, the Supreme Court explained that any aiding and abetting claim against a board advisor requires that advisor act with the second highest state of scienter—knowledge.   This explanation clarified its prior holding in RBC Capital Markets, LLC v. Jervis, which had been read to imply that the requisite state of scienter was recklessness.

The full opinion is available here