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Delaware Supreme Court Establishes Rules Facilitating Dismissal of Board Advisors from M&A Litigation   

The Temple 10-Q, Temple's Business Law Magazine
September 26, 2016, Christopher N. Kelly

In recent years, entrepreneurial plaintiffs’ lawyers representing stockholders in litigation challenging mergers and acquisitions have increasingly asserted aiding and abetting claims against financial and other advisors to corporate boards of directors, perceiving the investment banks and law firms that serve in these roles as potential defendants with deep pockets.  This trend likely will reverse itself following Singh v. Attenborough,[1] a May 2016 decision by the Delaware Supreme Court that will foreclose nearly all aiding and abetting claims against board advisors.

Singh was an appeal from the Delaware Court of Chancery’s dismissal of claims brought by stockholders of Zale Corporation relating to its acquisition by Signet Jewelers Limited.[2]  The plaintiffs had alleged, among other things, that Zale’s board of directors breached its fiduciary duties by failing to adequately inquire into its financial advisor’s potential conflicts of interest, and that the financial advisor aided and abetted that breach by failing to disclose its past relationships with Signet, which allegedly included a recent pitch concerning a potential acquisition of Zale.

The Court of Chancery first dismissed the claims against Zale’s directors based on the exculpatory provision in Zale’s charter and the plaintiffs’ failure to adequately plead a non-exculpated breach of the duty of loyalty.[3]  On reargument, the Court dismissed the plaintiffs’ aiding and abetting claim against Zale’s financial advisor, finding that the fully informed, uncoerced approval of the merger by Zale’s stockholders invoked the business judgment rule and that the plaintiffs had not adequately pled a predicate breach of the duty of care because there were insufficient factual allegations in the complaint indicating that Zale’s board had been grossly negligent in connection with its inquiry into the financial advisor’s potential conflicts.[4]

The Delaware Supreme Court, sitting en banc, affirmed “solely on the basis of [the Court of Chancery’s] decision on reargument . . . , finding that a fully informed, uncoerced vote of the disinterested stockholders invoked the business judgment rule standard of review.”[5]  The Court explained that the trial court’s consideration “whether the plaintiffs stated a claim for the breach of the duty of care after invoking the business judgment rule was erroneous,” reasoning that a gross negligence standard was not sufficiently deferential given that Zale’s stockholders had approved the merger.[6]  The Court stated, in pertinent part, as follows:     

When the business judgment rule standard of review is invoked because of a vote, dismissal is typically the result.  That is because the vestigial waste exception has long had little real-world relevance, because it has been understood that stockholders would be unlikely to approve a transaction that is wasteful.[7]

Additionally, the Court noted that it was “skeptical” that “the late disclosure of a business pitch that was then considered by the board, determined to be immaterial, and fully disclosed in the proxy” was sufficient for a court to rationally infer knowing wrongdoing on the part of the financial advisor.[8]  The Court explained that aiding and abetting requires “the second highest state of scienter—knowledge—in the model penal code,” and observed that “[n]othing in this record comes close to approaching the sort of behavior” in prior cases where aiding and abetting liability was imposed due to an advisor’s “fraud on the board.”[9]

In sum, the Supreme Court’s decision in Singh makes clear that the invocation of the business judgment rule following a fully informed stockholder vote generally requires a court to give case-dispositive deference to the transaction.  And the requirement that a plaintiff show that a financial advisor knowingly engaged in fraud on the board will make it extremely difficult to plead and prove an aiding and abetting claim, leading to quick dismissals of almost all such claims.

[1] 137 A.3d 151 (Del. 2016).

[2] See In re Zale Corp. S’holders Litig., 2015 WL 5853693 (Del. Ch. Oct. 1, 2015) (“Zale I”), opinion amended on reargument, 2015 WL 6551418 (Del. Ch. Oct. 29, 2015) (“Zale II”).

[3] Zale I, 2015 WL 5853693, at *12-18.

[4] Zale II, 2015 WL 6551418, at *4-5.

[5] Singh, 137 A.3d at 151.

[6] Id.

[7] Id. at 151-52.

[8] Id. at 152.

[9] Id. at 153 & n.7.