{"id":1013,"date":"2016-09-26T13:46:08","date_gmt":"2016-09-26T17:46:08","guid":{"rendered":"https:\/\/www2.law.temple.edu\/10q\/?p=1013"},"modified":"2016-09-26T13:46:08","modified_gmt":"2016-09-26T17:46:08","slug":"delaware-supreme-court-establishes-rules-facilitating-dismissal-board-advisors-ma-litigation","status":"publish","type":"post","link":"https:\/\/law.temple.edu\/10q\/delaware-supreme-court-establishes-rules-facilitating-dismissal-board-advisors-ma-litigation\/","title":{"rendered":"Delaware Supreme Court Establishes Rules Facilitating Dismissal of Board Advisors from M&amp;A Litigation"},"content":{"rendered":"<p>In recent years, entrepreneurial plaintiffs\u2019 lawyers representing stockholders in litigation challenging mergers and acquisitions have increasingly asserted aiding and abetting claims against financial and other advisors to corporate boards of directors, perceiving the investment banks and law firms that serve in these roles as potential defendants with deep pockets.\u00a0 This trend likely will reverse itself following <em>Singh v. Attenborough<\/em>,<a href=\"#_edn1\" name=\"_ednref1\">[1]<\/a> a May 2016 decision by the Delaware Supreme Court that will foreclose nearly all aiding and abetting claims against board advisors.<\/p>\n<p><em>Singh <\/em>was an appeal from the Delaware Court of Chancery\u2019s dismissal of claims brought by stockholders of Zale Corporation relating to its acquisition by Signet Jewelers Limited.<a href=\"#_edn2\" name=\"_ednref2\">[2]<\/a>\u00a0 The plaintiffs had alleged, among other things, that Zale\u2019s board of directors breached its fiduciary duties by failing to adequately inquire into its financial advisor\u2019s potential conflicts of interest, and that the financial advisor aided and abetted that breach by failing to disclose its past relationships with Signet, which allegedly included a recent pitch concerning a potential acquisition of Zale.<\/p>\n<p>The Court of Chancery first dismissed the claims against Zale\u2019s directors based on the exculpatory provision in Zale\u2019s charter and the plaintiffs\u2019 failure to adequately plead a non-exculpated breach of the duty of loyalty.<a href=\"#_edn3\" name=\"_ednref3\">[3]<\/a>\u00a0 On reargument, the Court dismissed the plaintiffs\u2019 aiding and abetting claim against Zale\u2019s financial advisor, finding that the fully informed, uncoerced approval of the merger by Zale\u2019s stockholders invoked the business judgment rule and that the plaintiffs had not adequately pled a predicate breach of the duty of care because there were insufficient factual allegations in the complaint indicating that Zale\u2019s board had been grossly negligent in connection with its inquiry into the financial advisor\u2019s potential conflicts.<a href=\"#_edn4\" name=\"_ednref4\">[4]<\/a><\/p>\n<p>The Delaware Supreme Court, sitting <em>en banc<\/em>, affirmed \u201csolely on the basis of [the Court of Chancery\u2019s] decision on reargument . . . , finding that a fully informed, uncoerced vote of the disinterested stockholders invoked the business judgment rule standard of review.\u201d<a href=\"#_edn5\" name=\"_ednref5\">[5]<\/a>\u00a0 The Court explained that the trial court\u2019s consideration \u201cwhether the plaintiffs stated a claim for the breach of the duty of care after invoking the business judgment rule was erroneous,\u201d reasoning that a gross negligence standard was not sufficiently deferential given that Zale\u2019s stockholders had approved the merger.<a href=\"#_edn6\" name=\"_ednref6\">[6]<\/a>\u00a0 The Court stated, in pertinent part, as follows:\u00a0\u00a0\u00a0 <em>\u00a0<\/em><\/p>\n<p style=\"text-align: center\">When the business judgment rule standard of review is invoked because of a vote, dismissal is typically the result.\u00a0 That is because the vestigial waste exception has long had little real-world relevance, because it has been understood that stockholders would be unlikely to approve a transaction that is\u00a0wasteful.<a href=\"#_edn1\" name=\"_ednref1\">[7]<\/a><\/p>\n<p>Additionally, the Court noted that it was \u201cskeptical\u201d that \u201cthe late disclosure of a business pitch that was then considered by the board, determined to be immaterial, and fully disclosed in the proxy\u201d was sufficient for a court to rationally infer knowing wrongdoing on the part of the financial advisor.<a href=\"#_edn8\" name=\"_ednref8\">[8]<\/a>\u00a0 The Court explained that aiding and abetting requires \u201cthe second highest state of scienter\u2014knowledge\u2014in the model penal code,\u201d and observed that \u201c[n]othing in this record comes close to approaching the sort of behavior\u201d in prior cases where aiding and abetting liability was imposed due to an advisor\u2019s \u201cfraud on the board.\u201d<a href=\"#_edn9\" name=\"_ednref9\">[9]<\/a><\/p>\n<p>In sum, the Supreme Court\u2019s decision in <em>Singh<\/em> makes clear that the invocation of the business judgment rule following a fully informed stockholder vote generally requires a court to give case-dispositive deference to the transaction.\u00a0 And the requirement that a plaintiff show that a financial advisor knowingly engaged in fraud on the board will make it extremely difficult to plead and prove an aiding and abetting claim, leading to quick dismissals of almost all such claims.<\/p>\n<p><a href=\"#_ednref1\" name=\"_edn1\"><\/a><\/p>\n<hr \/>\n<p><em>Christopher N. Kelly (LAW \u201906) practices in the Corporate Group of Potter Anderson &amp; Corroon LLP, where he focuses on\u00a0corporate and commercial litigation in the Delaware Court of Chancery.\u00a0 The views expressed by the author are not necessarily the views of Potter Anderson &amp; Corroon LLP or any of its clients.<\/em><\/p>\n<p><a href=\"#_ednref1\" name=\"_edn1\"><br \/>\n[1]<\/a> 137 A.3d 151 (Del. 2016).<\/p>\n<p><a href=\"#_ednref2\" name=\"_edn2\">[2]<\/a> <em>See In re Zale Corp. S\u2019holders Litig.,<\/em> 2015 WL 5853693 (Del. Ch. Oct. 1, 2015) (\u201c<em>Zale\u00a0I<\/em>\u201d), <em>opinion amended on reargument,<\/em> 2015 WL 6551418 (Del. Ch. Oct. 29, 2015) (\u201c<em>Zale\u00a0II<\/em>\u201d).<\/p>\n<p><a href=\"#_ednref3\" name=\"_edn3\">[3]<\/a> <em>Zale I<\/em>, 2015 WL 5853693, at *12-18.<\/p>\n<p><a href=\"#_ednref4\" name=\"_edn4\">[4]<\/a> <em>Zale II<\/em>, 2015 WL 6551418, at *4-5.<\/p>\n<p><a href=\"#_ednref5\" name=\"_edn5\">[5]<\/a> <em>Singh<\/em>, 137 A.3d at 151.<\/p>\n<p><a href=\"#_ednref6\" name=\"_edn6\">[6]<\/a> <em>Id.<\/em><\/p>\n<p><a href=\"#_ednref7\" name=\"_edn7\">[7]<\/a> <em>Id. <\/em>at 151-52.<\/p>\n<p><a href=\"#_ednref8\" name=\"_edn8\">[8]<\/a> <em>Id. <\/em>at 152.<\/p>\n<p><a href=\"#_ednref9\" name=\"_edn9\">[9]<\/a> <em>Id.<\/em> at 153 &amp; n.7.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>In recent years, entrepreneurial plaintiffs\u2019 lawyers representing stockholders in litigation challenging mergers and acquisitions have increasingly asserted aiding and abetting claims against financial and other advisors to corporate boards of directors, perceiving the investment banks and law firms that serve in these roles as potential defendants with deep pockets.\u00a0 This trend likely will reverse itself<\/p>\n","protected":false},"author":5,"featured_media":1014,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[12,13,14],"tags":[234,235,236],"coauthors":[101],"class_list":["post-1013","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-alumni-authored","category-business-law-practice","category-corporate-governance","tag-delaware-supreme-court","tag-ma-litigation","tag-zale-corporation","masonry-post","generate-columns","tablet-grid-50","mobile-grid-100","grid-parent","grid-33"],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v27.2 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Delaware Supreme Court Establishes Rules Facilitating Dismissal of Board Advisors from M&amp;A Litigation - The Temple 10-Q<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/law.temple.edu\/10q\/delaware-supreme-court-establishes-rules-facilitating-dismissal-board-advisors-ma-litigation\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Delaware Supreme Court Establishes Rules Facilitating Dismissal of Board Advisors from M&amp;A Litigation - The Temple 10-Q\" \/>\n<meta property=\"og:description\" content=\"In recent years, entrepreneurial plaintiffs\u2019 lawyers representing stockholders in litigation challenging mergers and acquisitions have increasingly asserted aiding and abetting claims against financial and other advisors to corporate boards of directors, perceiving the investment banks and law firms that serve in these roles as potential defendants with deep pockets.\u00a0 This trend likely will reverse itself\" \/>\n<meta property=\"og:url\" content=\"https:\/\/law.temple.edu\/10q\/delaware-supreme-court-establishes-rules-facilitating-dismissal-board-advisors-ma-litigation\/\" \/>\n<meta property=\"og:site_name\" content=\"The Temple 10-Q\" \/>\n<meta property=\"article:published_time\" content=\"2016-09-26T17:46:08+00:00\" \/>\n<meta name=\"author\" content=\"Christopher N. 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