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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