DealLawyers.com Blog

On Wednesday, the Delaware Supreme Court issued its decision in In re Columbia Pipeline Group, Inc. Merger Litigation, (Del. 6/25), which reversed a Chancery Court ruling finding a buyer liable for $400 million in damages for aiding and abetting breaches of fiduciary duty by the target’s directors and officers.

In a 99-page opinion authored by Justice Traynor, the Court relied heavily on its recent Mindbody decision, which was issued after the Chancery Court’s Columbia Pipeline decision. The opinion notes that there are four elements that must be established in order to prevail on an aiding and abetting claim: (1) the existence of a fiduciary relationship, (2) a breach of the fiduciary’s duty, (3) knowing participation in that breach of the defendants, and (4) damages proximately caused by the breach.”

The “knowing participation” element was the central issue in this case, and the Chancery Court held that this element could be established through constructive knowledge. Subsequently, Mindbody clarified that a plaintiff must show that the buyer had actual knowledge of both the breach itself and that its own conduct regarding the breach was improper (i.e., “culpable participation”) in order to establish knowing participation.

Justice Traynor said that the circumstances cited by the Chancery Court were insufficient to satisfy this actual knowledge requirement. As in Mindbody, the Court also concluded that aggressive bargaining tactics in the buyer’s own self-interest do not constitute the kind of culpable participation that can give rise to aiding and abetting liability:

[A]n aider and abettor’s participation in a primary actor’s breach of fiduciary duty must be of an active nature. It must include something more than taking advantage of the other side’s weakness and negotiating aggressively for the lowest possible price. Put another way, a bidder who has not colluded or conspired with its negotiating counterpart, who does not create the condition giving rise to a conflict of interest, who does not encourage his counterpart to disregard his fiduciary duties or substantially assist him in committing the breach, does not aid and abet the breach.

Similarly, as in Mindbody, the Court held that failures to comply with contractual obligations to notify the target of misstatements in its proxy materials were insufficient to establish the kind of substantial assistance to the breach contemplated by the knowing participation requirement:

Our analysis of a claim that a buyer aided-and-abetted disclosure breaches by a seller, however, is not a question of whether the buyer breached its contractual obligation alone. Instead, we evaluate whether the buyer’s conduct constitutes “substantial assistance” in the seller’s disclosure breaches. “Substantial assistance” in this context extends beyond “passive awareness of a fiduciary’s disclosure breach that would come from simply reviewing draft Proxy Materials.”

The Court said that in order to establish that the buyer provided substantial assistance, the plaintiff had to demonstrate that the buyer “knew that its failure to abide by its contractual duty to notify [Columbia] of potential material omissions in the Proxy Materials was wrongful and that its failure to act could subject it to [aiding-and-abetting] liability.”  In other words, “the knowledge that matters for the second prong of [the knowing participation element] is knowledge that the aider and abettor’s own conduct wrongfully assisted the primary violator in his disclosure breach.”

– John Jenkins