DealLawyers.com Blog

Yesterday, Chancellor McCormick issued a letter decision in the Electric Last Mile Solutions, Inc. Stockholder Litigation (Del. Ch.; 1/26) addressing the “knowing participation” element of aiding and abetting claims after the Delaware Supreme Court’s decisions in In re Mindbody, Inc., Stockholder Litigation and In re Columbia Pipeline Group, Inc. Merger Litigation.

‘To state a claim for aiding and abetting, a plaintiff must allege that a third party knowingly participated in a breach of fiduciary duty.’ [. . .] Knowing participation ‘involves two distinct concepts that are sometimes analyzed separately: knowledge and participation.’

‘Knowledge’ means the alleged aider and abettor has “knowledge that the primary party’s conduct was a breach’ and ‘knowledge ‘that their conduct was legally improper.’ [. . .] ‘Participation’ exists where an aider and abettor substantially assists the fiduciaries in breaching their duties. Substantial assistance involves “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.’ [. . .] [T]he Supreme Court in Mindbody and Columbia Pipeline have settled that a party’s failure to correct an incorrect proxy statement, even in the face of a contractual duty to do so, is not enough for a defendant’s conduct to amount to substantial assistance.

In this case, the plaintiffs claim that financial advisor, Jefferies, aided and abetted breaches of fiduciary duties through its involvement with materially misleading proxy disclosure and board presentations. Jefferies argued that its involvement constituted passive awareness or silent assent, but the court disagreed. Applying the four factors that the Chancery Court articulated in In re Dole Food Co., Inc. Stockholder Litigation and the DE Supreme Court adopted in Mindbody and Columbia Pipeline, Chancellor McCormick denied Jefferies’ motion to dismiss because three of the four Dole factors supported an inference that Jefferies knowingly participated in the breach, noting that Jefferies was the preparer of the allegedly misleading board presentation and stockholder presentation.

According to the Amended Complaint, Jefferies created the allegedly misleading September 2020 and December 2020 presentations. One was presented to the Forum III board (September 2020), the other was disseminated to stockholders (December 2020), and both contained the allegedly misleading representations that the Indiana Plant could produce over 100,000 vehicles per year and employed 400 workers.

The presentations also contained allegedly inflated financial projections. Jefferies did not disclose to the Forum III board that it had learned from its prior work with SF Motors that the Indiana Plant furloughed all but 16 of its workers, could only produce 50,000 to 70,000 vehicles per year, and that the financial projections for the plant were much lower than what would be disclosed in the Proxy Statement. It also failed to include any of that pre-IPO information in the September 2020 presentation, creating a misleadingly optimistic impression of Legacy ELMS when the presentation was disseminated to stockholders. Authoring a materially misleading statement is different than failing to correct someone else’s.

– Meredith Ervine