On May 6 2016 the Delaware Supreme Court confirmed that the Zale directors' conduct in the sale of Zale to Signet would be subject to the business judgement rule – having been approved by a vote of uncoerced, disinterested and informed stockholders – and on that basis should be reviewed under the deferential corporate waste standard.(1) The court expanded on its prior ruling in Corwin v KKR Financial that the business judgement rule will apply under such circumstances and resolved a divide in authority within the Delaware Court of Chancery as to whether, after such stockholder approval, the business judgement rule requires the directors' conduct to be reviewed under a standard of corporate waste or gross negligence. Confirming that a waste standard should govern, the court held that "dismissal is typically the result" of such claims.
The Delaware Supreme Court affirmed the trial court's application of the business judgement rule in reviewing the transaction, but concluded that the court had erred in conducting a thorough post-closing analysis under a gross negligence standard, since the Zale stockholders were uncoerced, disinterested and informed when they approved the Signet transaction. The Supreme Court instead concluded that the plaintiffs' claims should be evaluated under a corporate waste standard. Waste is proven only when "no person of ordinary or sound business judgment" could have found the transaction to be fair, and therefore such claims are typically dismissed.
As part of the Supreme Court's decision, it also affirmed the chancery court's dismissal of an aiding and abetting claim against Merrill Lynch, which had advised Zale's board of directors in connection with the sale. Pertaining to the defendants' motion to dismiss, the chancery court had concluded that the plaintiffs adequately alleged that:
- the Zale directors breached their duty of care by failing to evaluate Merrill Lynch's conflict of interest, which was premised on an earlier pitch presentation that the company had made to Signet concerning a potential acquisition of Zale; and
- Merrill Lynch knowingly aided and abetted that breach by failing to inform the directors of its conflicting interests in a timely manner.
However, the chancery court subsequently dismissed the aiding and abetting claim after concluding that the directors had not committed a predicate breach of fiduciary duty. The Supreme Court affirmed the dismissal, but "distanced" itself from the chancery court's earlier opinion that Merrill Lynch had knowingly aided and abetted a breach of duty by the Zale directors through "the late disclosure of a business pitch that was then considered by the board, determined to be immaterial, and fully disclosed in the proxy". The Supreme Court was "skeptical" that such conduct could support an aiding and abetting claim against a financial adviser and sought to contrast the allegations with the chancery court's post-trial findings in RBC Capital Markets LLC v Jervis – where RBC was found to have committed fraud against the directors it advised.
Ultimately, the Supreme Court's opinion provides more certainty that sell side directors' conduct during change-of-control transactions approved by an uncoerced, disinterested and informed stockholders vote will be subject to a deferential standard of review. The opinion also provides helpful guidance to the chancery court concerning aiding and abetting claims asserted against financial advisers – reminding the court that while such claims can be maintained against truly bad actors, Delaware law utilises a "defendant-friendly" standard for aiding and abetting liability and weak claims, like those asserted here, should be viewed skeptically.
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