January 16, 2019

Aiding & Abetting: Private Equity Buyer Dodges Bullet

I blogged last week about the Chancery’s decision in In re Xura Stockholders Litigation, (Del. Ch.; 12/18) in which the court held that the filing of an appraisal action didn’t preclude the plaintiffs from bringing fiduciary duty claims. As I mentioned in that blog, there’s a lot going on in the Xura case – and I want to circle back to how the court handled aiding & abetting claims brought against the buyer.

Last year, I blogged about an unusual situation in which an activist investor found itself liable for aiding & abetting its designated director’s breach of fiduciary duty. That decision notwithstanding, aiding & abetting claims remain mighty tough to prevail on in Delaware – and Xura illustrates just how high a mountain plaintiffs have to climb to make these claims.

In Xura, Vice Chancellor Slights denied the target CEO’s motion to dismiss breach of fiduciary duty claims premised on allegations that he tilted the playing field in favor of the private equity buyer that promised to retain him after the deal – while at the same time knowing that his head was potentially on the chopping block in the absence of a deal. However, the Vice Chancellor dismissed aiding & abetting claims against the buyer.

As this recent Cleary Gottlieb blog discussing the case points out, VC Slights dismissed the aiding & abetting claim notwithstanding a whole lot of “footsie” between the PE buyer & the target’s CEO:

Vice Chancellor Slights dismissed the plaintiff’s aiding and abetting claim against Siris, finding that the plaintiff failed to adequately allege that the acquiror knowingly participated in the breaches of fiduciary duty by Xura’s CEO. As noted above, the court reached this conclusion even though plaintiff alleged that (1) the acquiror knew the target CEO was favoring it over other potential bidders (because the complaint did not separately allege that the acquiror knew of the target CEO’s conflicted interests given his job situation); (2) the acquiror knew the target CEO was ignoring the target’s banker’s request to be included in communications with the acquiror (because the acquiror did not know that the target CEO’s refusal to include the financial advisor in such communications constituted a breach of fiduciary duty); and (3) the acquiror knew that the target was failing to disclose material information to its stockholders (because the acquiror did not facilitate those omissions).

The Vice Chancellor’s decision on this issue seemed to turn on the fact that while the buyer was aware of the laundry list of shenanigans laid out in the blog, there was no evidence that the CEO told the buyer that “he was in danger of losing his job if the Transaction fell through or that he was motivated to steer Xura into the Transaction for self-interested reasons.” As a result, the plaintiff couldn’t establish that the buyer “knowingly participated” in the breach.

John Jenkins