October 27, 2020

Aiding & Abetting: Del. Chancery Dismisses Claims Against Co-Investor

In Jacobs v. Meghji, (Del. Ch.; 10/20), the Delaware Chancery Court dismissed claims against an investor that participated side-by-side with a controlling stockholder in a financing for Infrastructure & Energy Alternatives (IEA). The plaintiff made fiduciary duty claims against IEA’s directors and its controlling stockholder, Oaktree Power Opportunities Fund II, but it also claimed that the other investor aided & abetted the fiduciaries’ breaches and was unjustly enriched.

The investor, Ares Management, was one of several competing bidders that submitted financing proposals to IEA. The plaintiff contended that Ares aided & abetted the board and controller’s breaches of fiduciary duty because it knew that Oaktree’s influence had unfairly skewed the deal’s terms in its favor, and went forward with its investment because it benefitted from those terms.

Vice Chancellor Zurn didn’t buy that argument, holding that as a bidder, Ares was entitled to look out for its own interests and didn’t have an obligation to promote the interests of the target.  This Morris James blog explains the Vice Chancellor’s reasoning:

Critical to the court’s evaluation was that Ares was a bidder. The Court  recognized Delaware precedent that a bidder who otherwise owes no fiduciary duty is under no obligation to maximize value for the target. The Court re-affirmed that “To allow a plaintiff to state an aiding and abetting claim against a bidder simply by making a cursory allegation that the bidder got too good a deal is fundamentally inconsistent with the market principles with which our corporate law is designed to operate in tandem.”  Applying this principle the Court held that plaintiff had failed to allege that Ares knew about the Company’s process, the role or creation of a special committee the Company formed to negotiate the transaction, or any flaws in the special committee’s negotiations.

Similarly, the Court held that plaintiff failed to allege knowledge of Oaktree’s breaches or “to demonstrate that knowledge of Oaktree’s breach could transitively or constructively support knowledge of the [director defendants’] breaches.”  The Court held that the mere participation with a known controller in a  beneficial transaction does not, without more, demonstrate aiding and abetting liability and that plaintiff had failed to allege that “Ares had any knowledge that Oaktree wrongfully orchestrated and infected [the Company’s] transaction process such that Ares would know the [director defendants] were breaching their duties.” The Court concluded that “Consistent with longstanding principles of law and capitalism, Ares exercised its right to secure for itself a “sweet” deal.”

The Vice Chancellor also held that Ares’ arms-length negotiations with the company & the special committee and plaintiff’s failure to allege its knowing complicity in any breach of fiduciary duty required the unjust enrichment claim against it to be dismissed as well.

John Jenkins