I’ve blogged quite a bit over the past year about the Chancery Court’s unwillingness to dismiss a variety of officer liability claims. Allegations that officer misconduct in connection with an M&A transaction perpetrated a “fraud on the board” have featured prominently in several of these cases. Vice Chancellor Laster’s recent decision in In re Columbia Pipeline Group, Inc. Merger Litigation, (Del. Ch.; 3/21) adds another case to that list.
The case arose out of Columbia Pipeline’s sale to TransCanada Corp. The plaintiffs alleged that the seller’s CEO & CFO breached their fiduciary duties by tilting the playing field in favor of TransCanada, their preferred bidder. They also alleged that TransCanada aided & abetted the officers’ breach of their fiduciary duty.
The complaint cited a number of examples of alleged misconduct, including TransCanada’s initiation of contact with the CFO in violation of a standstill agreement entered into with potential bidders, the CFO’s failure to inform the board of that contact and subsequent communications concerning that contact with the CEO & the Company’s financial advisor, and the sharing of confidential information with TransCanada – including information about how TransCanada could preempt a sale process – without the board’s approval.
The complaint also alleged that TransCanada again violated the standstill by submitting an offer for the company, that the CFO gave the board misinformation and made material omissions when discussing TransCanada’s bid, that the officers failed to follow the board’s instructions with respect to disclosing the board’s decision to waive standstill agreements with the other bidders, and that they took other actions that favored TransCanada during the bidding process.
Vice Chancellor Laster held that the plaintiffs’ allegations were sufficient to support a claim that the officers breached their fiduciary duty of loyalty. The excerpt from Potter Anderson’s summary of the case explains his reasoning:
The Court held, at the pleading stage, the alleged course of conduct supported a reasonable inference that the sale process failed enhanced Revlon scrutiny as Skaggs and Smith unduly favored TransCanada for improper personal reasons. The Court cited the January 7 meeting where TransCanada supposedly violated the standstill and Smith allegedly provided confidential information, handed over private talking points, and told TransCanada it was unlikely to face competition.
The Court also pointed to Skaggs’s presentation to the Board that supposedly contained material omissions and misrepresentations as to Company’s value. The Court also pointed to Skaggs’ and Smith’s purported lack of transparency with the Board, their repeated delays in carrying out Board directives to inform other bidders that their standstills were waived, and their downplaying of Spectra’s interest. The Court also cited Skaggs’ alleged treatment of TransCanada with exclusivity even when not required and his “serious moral commitment” to TransCanada to only respond to other bidders if they present a “serious written proposal” meaning a “financed bid subject only to confirmatory diligence.”
The Vice Chancellor also upheld the plaintiffs aiding & abetting claims against TransCanada, citing the allegations of multiple violations of the standstill agreement and other circumstances indicating that TransCanada had acted with knowledge of the officers’ fiduciary violations.
A Fried Frank memo provides an in-depth review of the issues raised by the case, and has this to say about the fraud on the board theory:
The decision highlights the court’s recent focus on the “fraud on the board” theory of liability. Under this theory, in connection with a company sale process, a plaintiff can plead a claim against a corporate officer, director or advisor by showing that he or she withheld material information from the directors that would have affected their decision-making or took action that materially and adversely affected the sale process without informing the board. (We note that Vice Chancellor Laster emphasized this theory of liability in the recent Presidio decision as well.)
-John Jenkins, DealLawyers.com March 17, 2021