Vice Chancellor Laster’s 115-page opinion in Firefighters’ Pension System v. Presidio, (Del. Ch.; 1/21), covers a lot of ground, but today I’m going to focus on the “man bites dog” aspect of the case – the Vice Chancellor’s decision to refuse to dismiss aiding & abetting claims against a buyer. The lawsuit arose out of the sale of Presidio, Inc. to an affiliate of BC Partners, a private equity firm. The parties entered into a merger agreement, and the trouble began when a competing bidder surfaced during the “go shop” period provided in the merger agreement.
To make a long story short, the target’s investment banker allegedly tipped off the buyer about the price offered in the competing bid without telling the target’s board that it had done so. The tip enabled the buyer to up its price just enough to shut out the other bidder, and to successfully compel the board to shorten the negotiation period specified in the go shop & to more than double the applicable termination fee. In turn, that led to the competitor’s decision to drop its bid.
The plaintiff brought fiduciary duty claims against the controlling stockholder and the target’s directors, as well as aiding and abetting claims against the target’s investment banker and the buyer. Aiding & abetting claims against a target’s investment banker have resulted in at least one eye-popping judgment, but Delaware courts typically are reluctant to uphold such claims against a buyer. That’s a point that the Vice Chancellor acknowledged:
“A third-party bidder who negotiates at arms’ length rarely faces a viable claim for aiding and abetting.” Del Monte, 25 A.3d at 837. The general rule is that “arm’s-length bargaining is privileged and does not, absent actual collusion and facilitation of fiduciary wrongdoing, constitute aiding and abetting.” Morgan v. Cash, 2010 WL 2803746, at *8 (Del. Ch. July 16, 2010). The pleading burden to establish knowing participation against a third-party acquirer is accordingly high. A difficult pleading standard “aids target stockholders by ensuring that potential acquirors are not deterred from making bids by the potential for suffering litigation costs and risks on top of the considerable risk that already accompanies [a transaction].” Id.
The Vice Chancellor concluded that the plaintiff had surmounted these burdens and adequately pled the buyer’s knowing participation in the banker’s wrongful conduct.
In particular, he pointed out that the buyer knew that the only information it was contractually entitled to receive about a competing bid was the bidder’s identity. Despite that fact, the buyer allegedly was secretly tipped off about the price of the competing bid & immediately sought to capitalize on that information in formulating its own bid. The Vice Chancellor also said that it was reasonable to infer that the buyer sought to take advantage of the tip by pressuring the Board into increasing the termination fee and amending other terms of the merger agreement to tilt the sale process in its favor.
Interestingly, the target’s failure to disclose information about the tip in its proxy statement until after the litigation was filed also counted against the buyer. VC Laster pointed out that the buyer did not say anything about the lack of disclosure, despite the fact that the merger agreement gave it the right to review the proxy statement prior to its filing.
– John Jenkins