October 18, 2018

Unusual Suspect? Activist Liable for Aiding & Abetting Fiduciary Duty Breach

After the Rural/Metro mess of a few years ago, there are few words that send a chill down a dealmaker’s spine more quickly than “aiding & abetting.”  This Cleary Gottlieb blog says that a recent Delaware Chancery Court decision imposed aiding & abetting liability on an unusual suspect – an activist investor  Here’s the intro:

The Delaware Court of Chancery yesterday found an activist investor aided and abetted a target board’s breaches of fiduciary duty, most significantly by concealing from the target board (and from the stockholders who were asked to tender into the transaction) material facts bearing on a potential conflict of interest between the activist investor and the target’s remaining stockholders. See In re PLX Technology Inc. S’holders Litig., C.A. No. 9880-VCL (Del. Ch. Oct. 16, 2018).

At issue in the case was the failure of an activist & its board representative to disclose a tip received about a potential buyer’s interest in the company to the full board. Vice Chancellor Laster said that withholding that information was inappropriate, both because the activist’s short-term focus might lead it to seek a quick sale in lieu of long-term value maximization, & because of the director’s role in spearheading the potential sale process. As a result, he held that the director breached his fiduciary duty by failing to disclose the tip, and that the activist aided & abetted that breach.

Notwithstanding the finding of liability, there was an important silver lining for the activist – the Court held that there were no recoverable damages in the case, based in large part on its conclusion that the sale process, though flawed by the non-disclosure, was sufficient under Dell & DFC Global to result in deference to the deal price as representing the company’s value.

The blog says that the key takeaways from the case are the importance of full disclosure of conflicts to the board and shareholders, and the Chancery Court’s willingness to extend the deference to the deal price found in recent appraisal cases to breach of fiduciary duty and aiding and abetting claims.

John Jenkins