Delaware Supreme Court Affirms Dismissal of Aiding and Abetting Claims Against Financial Advisor Because of a Fully Informed, Uncoerced Stockholder Vote
In Singh v. Attenborough, 1 the Delaware Supreme Court (Strine, C.J.), sitting en banc, affirmed the Chancery Court’s dismissal on reargument of aiding and abetting claims against a financial advisor to Zale Corporation in connection with the company’s sale to Signet Jewelers Ltd. because of the cleansing effect of a fully informed, uncoerced vote of Zale’s disinterested stockholders. The Court held that the stockholder vote approving Zale’s sale to Signet entitled the Zale directors to the deference of business judgment review under Corwin v. KKR Financial, 2 and that since there was no viable claim against the directors for breach of fiduciary duty under the business judgment standard of review, there could be no aiding and abetting claim against the financial advisor.
Importantly, however, the Supreme Court disagreed with the Chancery Court’s decision, applying business judgment review, to consider whether the Zale directors had breached their duty of care by being grossly negligent, notwithstanding the shareholder vote. The Supreme Court held that under business judgment review, after a fully informed, uncoerced vote of stockholders, the only viable duty of care claim against directors is for waste, a claim it referred to as “vestigial,” having “long had little realworld relevance because it has been understood that stockholders would be unlikely to approve a transaction that is wasteful.”3 The Supreme Court explained that since gross negligence is the damages liability standard for transactions in which there is no stockholder vote, applying the same standard for transactions approved by a fully informed, uncoerced vote would nullify the “standard-of-review-shifting effect” of the vote. Applying the standard to the Zale case, the Supreme Court found no rational argument that waste had occurred.
The Supreme Court also “distance[d]”4 itself from the analysis in the Chancery Court’s original opinion of aiding-and-abetting claims against Zale’s financial advisor. The Court stated that it was “skeptical”5 that the allegedly late disclosure by Zale’s financial advisor of a pitch it previously had made to Signet (regarding an acquisition of Zale that the Zale board determined was immaterial and disclosed in the proxy to Zale stockholders) was sufficient to plead the necessary scienter element (knowing participation) to support an aiding and abetting claim against the financial advisor. The Court, however, made clear that any suggestion by the Chancery Court in Zale that a financial advisor can only be held liable for aiding and abetting a non-exculpated breach of fiduciary duty was erroneous. Citing to its holding in Rural Metro, 6 the Supreme Court reiterated that a financial advisor that induces a board to breach its situational duties in the sale of control – to maximize shareholder value can be held liable for aiding and abetting even in the absence of a finding of gross negligence by directors. “To grant immunity to an advisor because its own clients were duped by it,” the Court stated, “would be unprincipled and would allow corporate advisors a level of unaccountability afforded to no other professionals in our society.”7
The Delaware Supreme Court’s Singh decision clarifies to some extent the aiding and abetting landscape for advisors to boards. It confirms that a fully informed, uncoerced vote of disinterested stockholders will serve in most cases to cleanse any defects in underlying sales processes and limit the degree to which directors and advisors will be found liable for post-closing damages. It also reiterates the Supreme Court’s ruling in Rural Metro that advisors may be found liable for aiding and abetting situational breaches of duty of care by directors, as for example by running an unreasonable sales process, even though there is no finding of gross negligence by any director. To find such liability, however, there needs to be a showing of bad-faith actions by the advisor that brought about the board’s breach. And, in most instances, full and timely disclosure by the financial advisor of potentially disabling conflicts will serve to obviate any such claims. The imposition of business judgment review resulting from an informed stockholder vote makes even more critical the importance of full disclosure to stockholders. Notably, the heightened need for full disclosure comes just at a time when the Delaware Courts have also made clear that they increasingly are unlikely to approve disclosure-only settlements.