Delaware Supreme Court Holds Approval of Deal by Disinterested, Informed Stockholders Requires Dismissal of Aiding-and-Abetting Claims Against M&A Advisor
 

On Friday, May 6, an en banc Delaware Supreme Court affirmed the Delaware Court of Chancery’s dismissal with prejudice of a claim against Merrill Lynch, Pierce, Fenner & Smith (“Merrill Lynch”) for aiding and abetting a breach of fiduciary duty while serving as financial advisor to Zale Corp. (“Zale”) in its sale to Signet Jewelers (“Signet”).  Singh v. Attencorough, No. 645, 2015 (Del. May 6, 2016) (en banc).  The decision has significant implications for (i) the effect of stockholder approval of a merger on the standard of review and (ii) investment banker conflicts. 

First, the Delaware Supreme Court held that a fully-informed, uncoerced vote of the disinterested stockholders invokes the business judgment rule standard of review, reiterating its recent holding in Corwin v. KKR, 125 A.3d 304 (Del. 2015).  It repudiated the Court of Chancery’s suggestion, however, that there is a “gross negligence” exception to the Corwin rule.  Rather, when the business judgment rule is invoked because of a stockholder vote, the standard of review is waste, which, the Court notes, has “little real-world relevance,” and that, practically speaking, “dismissal is the typical result.”

Second, the Court spoke to the allegations concerning purported investment banker conflicts.  In claiming that Merrill Lynch aided and abetted the Zale Board’s breach of fiduciary duty, the plaintiffs argued that Merrill Lynch had a conflict of interest because it had previously made an unsolicited pitch to Signet in which it suggested that Signet acquire Zale, and did not disclose the pitch to Zale before being retained to represent Zale in its sale to Signet.  The pitch was disclosed—after the transaction had been announced—to the Zale Board, which found that the pitch did not impact its determination and recommendation regarding the merger, and disclosed the pitch and its findings in the proxy, before the stockholder vote. 

While the stockholder vote made it unnecessary for the Court to address the substance of plaintiffs’ conflict allegation, the Court expressed “skeptic[ism]” that the “late disclosure of a business pitch that was then considered by the board, determined to be immaterial, and fully disclosed in the proxy[] produced a rational basis to infer scienter.”  Contrasting Merrill Lynch’s conduct with another recent case, the Court explained that “[n]othing in this record comes close to approaching the sort of behavior at issue in” RBC Capital Markets v. Jervis, 129 A.3d 816 (Del. 2015), where the financial advisor created an “informational vacuum,” using its position as advisor to seek a role in providing buy-side financing and a financing role in a parallel transaction for a competing company, all without disclosing its intentions. 

Even though it found no conflict in this case, the Supreme Court cautioned against the type of conflict in Jervis, rejecting the Court of Chancery’s decision to the extent it suggested that an advisor can only be liable if it aids and abets a non-exculpated breach of fiduciary duty.  Should an advisor act with bad faith and “purposely [misleads] the board so as to proximately cause the board to breach its duty of care,” as was the case in Jervis, the advisor will not find refuge in director exculpation clauses or in the client’s “good-faith reliance on misleading and incomplete advice tainted by the advisor’s own knowing disloyalty.”  Absent such bad faith or disloyalty, however, the Court’s decision confirms that aiding-and-abetting claims against investment banks based on alleged conflicts of interests will be dismissed where the merger is approved by disinterested stockholders in an informed vote.