DealLawyers.com Blog

Yesterday, the Delaware Supreme Court issued its opinion in In re Mindbody, Inc., Stockholder Litigation, (Del.; 12/24), in which it overruled the Chancery Court’s decision holding a buyer liable for aiding and abetting target fiduciaries’ breach of fiduciary duty based upon its role in reviewing the target company’s merger proxy materials.

In order to assert an aiding and abetting claim, the plaintiffs must allege that the buyer knowingly participated in a breach of fiduciary duty. The plaintiffs in this case alleged that the board and CEO breached their fiduciary duties of disclosure because target’s proxy statement failed to disclose, among other things, details about early interactions between the buyer and the target’s CEO. With respect to that aspect of the claim, Chancellor McCormick pointed to language contained Section 6.3(b) of the merger agreement, which gave the buyer the right to review the proxy statement prior to its filing.

That language, or something similar to it, has likely been included in just about every public company merger agreement ever filed. But it took on perhaps unexpected significance in the evaluation of the plaintiffs’ aiding and abetting claim against the buyer. That’s because Chancellor McCormick pointed to it as supporting the knowing conduct on the part of the buyer necessary to establish such a claim:

“[T]he merger agreement contractually entitles Vista to review the proxy and requires Vista to inform Mindbody of any deficiencies with the proxy. Vista knew that the proxy did not disclose information about Vista’s own dealings with Stollmeyer, dealings which I previously found support the plaintiffs’ claim for breach of the duty of disclosure. The plaintiffs thus adequately alleged that Vista knowingly participated in the disclosure violation related to Stollmeyer’s early interactions with Vista.”

The Delaware Supreme Court disagreed.  In an opinion authored by Justice Valihura, the Court unanimously held that a buyer’s knowledge that a target fiduciary has breached its fiduciary duty is not sufficient to establish knowing participating in the breach. Instead, the plaintiff must show that the aider and abettor had actual knowledge that its own conduct was legally improper. The Court concluded that this was not established in the present case.

The Court then went on to note that in the context of an arms’- length bargaining process between a buyer and a seller, “participation” in the breach should be “most difficult” to prove. It reviewed Delaware case law establishing that in order to be regarded as participating in a breach, the defendant must provide “substantial assistance” to the primary violator.  Although the Court acknowledged that some courts have held that a failure to act is sufficient to establish substantial assistance, it said that isn’t the path that Delaware has taken:

Rather, our case law in the corporate governance context has found liability only where there has been overt participation such as active “attempts to create or exploit conflicts of interest in the board” or an overt conspiracy or agreement between the buyer and the board as described above.

This substantial assistance requirement can also be understood as requiring active participation rather than “passive awareness.” As the Court of Chancery explained in Buttonwood, “passive awareness on the part of [the defendant] does not constitute ‘substantial assistance’ to any breach resulting from [the primary violator’s] failure to disclose the facts.”

In RBC, we affirmed aiding and abetting liability for a financial advisor who “purposely misled the [seller’s] Board so as to proximately cause the Board to breach its duty of care.” In Buttonwood, however, the Court of Chancery held that a financial advisor was not liable for “passive awareness . . . of the omission of material facts in disclosures to the stockholders, made by fiduciaries who themselves were aware of the information.

Applying this case law and the factors identified in the Restatement (Second) of Torts as being necessary to establish knowing participation, the Court concluded that the buyer’s passive awareness of a fiduciary’s breach of disclosure duties that would come from simply reviewing draft proxy materials was insufficient to impose aiding and abetting liability.

While the Court let the buyer off the hook, the target’s CEO didn’t fare as well. The Supreme Court upheld the Chancery Court’s ruling that he breached his fiduciary duties as well as its decision to award the plaintiff $44 million in damages for those breaches.

– John Jenkins