On Friday, the Chancery Court added to the list of recent case law addressing aiding & abetting breach of fiduciary duty claims when Vice Chancellor Laster issued his decision in In re: EngageSmart Stockholder Litigation, (Del. Ch.; 2/26).  In that case, the Vice Chancellor dismissed aiding & abetting claims against the buyer, but refused to dismiss similar claims brought against the target’s financial advisor.

The case arose out of a take-private transaction in which the company’s public stockholders were cashed out at a price of $23 per share. The controlling stockholder sold a portion of its shares, but rolled over its remaining shares into a 35% ownership interest in the surviving company. The controller also allegedly received an undisclosed $500 million post-closing dividend on the shares it rolled over.

The plaintiffs alleged breach of fiduciary duty and aiding & abetting against the parties involved in the transaction. In support of those claims the plaintiffs contended that the controlling stockholder dominated the transaction process and discouraged competing bids, that the target’s advisors were conflicted, and that the deal delivered non-ratable benefits to the controller at the expense of the public stockholders.

Despite the parties’ efforts to fit within the strictures of MFW (this was a pre-SB 21 transaction), Vice Chancellor Laster concluded that because the complaint plausibly alleged disclosure shortcomings, he would not apply MFW at the pleading stage, and the claims would be evaluated under the entire fairness standard. Since the defendants didn’t move to dismiss based on satisfaction of that standard, the Vice Chancellor allowed most of fiduciary duty claims to move forward.

In contrast, Vice Chancellor Laster dismissed aiding & abetting claims against the buyer, citing the Delaware Supreme Court’s recent decisions in Mindbody and Columbia Pipeline. However, he refused to dismiss such claims against the target’s financial advisor.

In reaching that conclusion, he cited allegations regarding the financial advisor’s collaboration with the controlling stockholder in structuring the transaction and in designing the marketing process, its “tipping” the buyer concerning an acceptable price, and its exclusion of the special committee’s financial advisor from involvement in the sale process.  He also pointed to existing business relationships between the financial advisor, the controller and the buyer.

The plaintiffs also alleged that the financial advisor aided & abetted disclosure violations by the target.  Vice Chancellor Laster deferred ruling on this claim, based on what he considered tension between the Delaware Supreme Court’s rulings in RBC Capital and its more recent decisions in Mindbody and Columbia Pipeline. Here’s an excerpt from his opinion:

If RBC Capital remains good law, then the allegations against Goldman state a claim for aiding and abetting a breach of the duty of disclosure. This decision has found that the Proxy Statement failed to disclose the full extent of Goldman’s relationships with General Atlantic, Vista, and Summit. This decision has also found that the Proxy Statement failed to provide an accurate picture of Goldman’s role.

At the pleading stage, it is inferable that Goldman withheld the pertinent information, putting this case on all fours with RBC Capital and stating a claim on which relief can be granted. That outcome also comports with Electric Last Mile, a post-Mindbody, post-Columbia Pipeline decision that upheld a claim for aiding and abetting disclosure violations against a financial advisor on similar facts.

Admittedly, the logic of Mindbody and Columbia Pipeline pulls in the other direction, at least for the Restatement element that considers the nature and amount of assistance given by the secondary actor. Under those decisions, Goldman would have to owe a duty to the public stockholders. Although RBC Capital supports the existence of such a duty, it does so in passing and only in three words.

Vice Chancellor Laster went on to say that RBC Capital has not been widely read to recognize this direct duty of disclosure to stockholders, and that reading it this way would break new ground.  He also pointed out that under a more conventional theory based on the financial advisor’s duty of disclosure to the target, Mindbody and Columbia Pipeline indicate that failing to provide information in the face of a known duty amounts only to passive inaction, which is insufficient to impose aiding & abetting liability.

In light of these uncertainties, and because he allowed the other aiding & abetting claims against the financial advisor to move forward, the Vice Chancellor determined to defer addressing the disclosure-based claims until trial.

– John Jenkins

On Friday, the Delaware Supreme Court issued its decision in Rutledge v. Clearway Energy, (Del. 2/26), in which the Court unanimously concluded that SB 21’s amendments to the DGCL were constitutional.

During the contentious debate over SB 21, academic commentators raised the issue of whether the statute limited the equitable powers of the Chancery Court in a way that violated provisions of Delaware’s constitution. Shortly after the amendments were enacted, plaintiffs filed constitutional challenges  to SB 21, and the Chancery Court subsequently certified the following constitutional questions to the Delaware Supreme Court:

1. Does Section 1 of Senate Bill 21, codified at 8 Del. C. § 144— eliminating the Court of Chancery’s ability to award “equitable relief” or “damages” where the Safe Harbor Provisions are satisfied—violate the Delaware Constitution of 1897 by purporting to divest the Court of Chancery of its equitable jurisdiction?

2. Does Section 3 of Senate Bill 21—applying the Safe Harbor Provisions to plenary breach of fiduciary claims arising from acts or transactions that occurred before the date that Senate Bill 21 was enacted—violate the Delaware Constitution of 1897 by purporting to eliminate causes of action that had already accrued or vested?

The Court, in an opinion written by Justice Traynor, held that neither of the challenged provisions violated Delaware’s Constitution. Here’s an excerpt from Justice Traynor’s discussion of the first certified question:

SB 21 does not divest the Court of Chancery of jurisdiction of any cause of action, nor does it direct any claim or category of claims to another court. Breach of fiduciary duty claims remain within the undisputed jurisdiction of the Court of Chancery. Indeed, Rutledge’s claim itself remains within the Court of Chancery’s jurisdiction, albeit subject to a review framework he finds unfavorable.

Although the relief—equitable relief or damages—the Court of Chancery formerly would consider is now unavailable when it determines that a challenged transaction has been approved by one of the two statutorily designated cleansing mechanisms, SB 21 does not strip the court of its jurisdiction over equitable claims. Instead, SB 21 represents, in our view, a legitimate exercise of the General Assembly’s authority to enact substantive law that, in its legislative judgment, serves the interests of the citizens of our State.

The Court also concluded that SB 21 did not divest the plaintiff from a cause of action that had already accrued:

[C]ontrary to what Rutledge contends, SB 21 does not extinguish his right of action. He may yet challenge the Clearway transaction based upon allegations that Clearway’s CEO and majority stockholders breached their fiduciary duties. To be sure, the court must now review the challenged transaction under statutory standards that changed after the transaction closed but before Rutledge filed suit. It is highly questionable, however, that the statutory change effected the extinguishment of Rutledge’s vested right. His interest, to the contrary, appears to be more “an anticipated continuance of the existing law” than a vested property right.

While there are undoubtedly many battles to come over the scope and operation of the changes to the DGCL enacted in SB 21, it appears that Friday’s decision from the Delaware Supreme Court at least puts the constitutional issues to rest.

We’re posting memos in our “Controlling Shareholders” Practice Area.

– John Jenkins