Over the past year, corporate litigators have paid close attention to two developing trends in mergers and acquisitions litigation. The first relates to difficulties in obtaining approval of disclosure-only settlements in Delaware. The second trend is the continued development of the law relating to liability on the part of financial advisers due to alleged conflicts of interest.
For years, Delaware courts have voiced concerns about settlements in merger objection class actions, which grant a global release to defendants and attorneys’ fees to plaintiff’s counsel, while the only consideration to the class consists of “supplemental disclosures” in the company’s proxy statement. Typically, this includes additional background information on the merger and/or the inputs used by the financial advisor in its fairness analysis.
In In re Trulia Stockholder Litigation, 129 A.3d 884 (Del. Ch. 2016), Chancellor Bouchard rejected a disclosure-only settlement outright on the grounds that the supplemental disclosures obtained by plaintiffs, which purportedly served as consideration for a broad release, were not material “or even helpful to Trulia’s stockholders,” and therefore did not support the class “give” of a broad release of class claims. Chancellor Bouchard warned that “the Court’s historical predisposition toward approving disclosure-only settlements needs to be reexamined,” and that following Trulia, litigants “can expect that the Court will be increasingly vigilant in scrutinizing the ‘give’ and the ‘get’ of such settlements to ensure that they are genuinely fair and reasonable to the absent class members.”
Financial Advisor Liability
Historically, financial advisors engaged to advise companies and their boards could be confident that they were relatively immune from liability to stockholders as long as they performed their work with reasonable care and the directors did not breach any fiduciary duties when working with the advisor. Over the past few years, financial advisors have come under increased scrutiny following a series of opinions issued by Delaware courts. Recently, both the Delaware Court of Chancery and the Delaware Supreme Court have issued opinions in the litigation involving the merger of Zales and Signet jewelers. See In re Zale Corporation Stockholders Litigation, 2015 WL 5853693 (Del. Ch. Oct. 1, 2015), amended at 2015 WL 6551418 (Del. Ch. Oct. 29, 2015); Singh v. Attenborough, 2016 WL 2765312 (Del. Supr. May 6, 2016).
The Court of Chancery issued its original opinion in early October of 2015. Zale stockholders had challenged the proposed sale of the company to Signet on the grounds that Zale’s financial advisor in the transaction, Merrill Lynch, had been an active advisor to Signet in the months leading up to the transaction. Notably, Merrill Lynch had made a presentation to Signet’s board regarding a possible acquisition of Zale, and a senior member of the Merrill Lynch team advising Zale had participated in the presentation. Zale’s board did not learn of this potential conflict until after the merger agreement had been signed. In addition to the customary claims against Zale directors for breach of fiduciary duties, the lawsuits included claims against Merrill Lynch for aiding and abetting these breaches. While the Chancery Court eventually dismissed all claims against the Zale defendants, the court initially refused to dismiss the claim for aiding and abetting against Merrill Lynch, finding that the financial advisor had an independent and affirmative obligation to disclose its conflicts to the Zale board no matter how immaterial or “ordinary course” the actions giving rise to the conflict might have seemed. Notwithstanding the fact that Merrill Lynch eventually did disclose its prior work with Signet to the board, and that disclosures about that work were included in the proxy statement sent to stockholders, the conflict was not necessarily cleansed because stockholders may have been damaged prior to the disclosure in the form of “money [left] on the table” during merger negotiations.
While the Chancellor eventually dismissed the claims against Merrill Lynch following reargument (on the grounds that plaintiff could not state a claim for aiding and abetting without first stating a non-exculpated claim for breach of fiduciary duties against the directors whom they supposedly aided and abetted), the Delaware Supreme Court took issue with the trial court’s underlying reasoning. Though the Supreme Court ultimately affirmed the dismissal, it did so based on its finding that the stockholder vote was fully informed and voluntary, and expressed skepticism that one could reasonably infer scienter (or intentional misconduct) from 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 disagreed with the trial court’s grounds for dismissal against the advisor—that a plaintiff was required to plead a non-exculpated claim for breach of fiduciary duty on the part of the company’s directors in order to support a claim against the advisor for aiding and abetting. “The advisor is not absolved from liability simply because its client’s actions were taken in good faith reliance on misleading and incomplete advice tainted by the advisor’s own knowing disability.”
In other words, while the Delaware Supreme Court ultimately found that the alleged conduct at issue in Zales did not support a claim for aiding and abetting liability, advisors will continue to have their conduct evaluated on its own merit. Advisors will not be able to avoid liability simply by relying on the fact that their client’s directors did not breach their fiduciary duties, which might—in certain circumstances—leave the conflicted advisor as the sole defendant on the hook for damages.
Corporate litigators should continue to keep a close eye on these trends as they develop.