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May 6 — Investors can't bring aiding and abetting claims against Merrill Lynch over its role in advising Zale Corp.'s board on the company's $1.4 billion merger with Signet Jewelers Ltd, the Delaware Supreme Court ruled May 6.
The state high court affirmed an October 2015 decision by the Delaware Chancery Court, which found after the case was re-argued that there was no underlying breach of fiduciary duty by Zale's board under the deferential business judgment rule (59 CARE 59, 11/2/15).
In its decision on reargument, the chancery court held that when a merger is approved by a fully informed, statutorily required vote of a majority of disinterested stockholders, the correct standard for finding a breach of the duty of care under the business judgment rule is gross negligence.
The Delaware Supreme Court found that the business judgment rule was properly invoked in the case. However, it said the lower court's decision to consider post-closing whether the plaintiffs stated a claim for breach of the duty of care was erroneous.
“Absent a stockholder vote and absent an exculpatory charter provision, the damages liability standard for an independent director or other disinterested fiduciary for breach of the duty of care is gross negligence, even if the transaction was a change-of-control transaction,” Chief Justice Leo E. Strine Jr. wrote for the court. “Therefore, employing this same standard after an informed, uncoerced vote of the disinterested stockholders would give no standard-of-review-shifting effect to the vote.”
The Delaware Supreme Court also distanced itself from the chancery court's original decision, issued before reargument, in which it allowed aiding and abetting claims to proceed based on allegations that a senior member of Merrill's team that advised Zale's board on the merger also was on the team that gave a presentation to Signet regarding an earlier potential acquisition of Zale (39 CARE, 10/2/15).
“We are skeptical that the supposed instance of knowing wrongdoing—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,” Strine wrote.
In addition, the court found that the lower court's original decision was erroneous to the extent it concluded that an adviser can only be held liable for aiding non-exculpated breaches of duty.
Strine said that Delaware provides financial advisers “with a high degree of insulation from liability by employing a defendant-friendly standard.” However, he added that advisers aren't absolved from liability simply because boards in good faith rely on their advice.
“To grant immunity to an advisor because its own clients were duped by it would be unprincipled and would allow corporate advisors a level of unaccountability afforded to no other professionals in our society,” he said.
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