Aiding and abetting claims against a buyer for a target’s breach of fiduciary duties are meant to be rare, given the “long-standing rule that arm’s-length bargaining is privileged and does not, absent actual collusion and facilitation of fiduciary wrongdoing, constitute aiding and abetting . . .” (emphasis added). Yet to survive a motion to dismiss, plaintiff must show only that it is “reasonably conceivable” that buyer “knowingly participated” in the breach of fiduciary duties. This may explain why there were at least three cases last year in which aiding and abetting claims against buyer survived a motion to dismiss.
Aiding and abetting claims can be particularly attractive to plaintiffs, because even if the underlying fiduciary duty breaches are exculpated duty of care claims, aiding and abetting claims against buyer and/or financial advisor will be allowed to proceed, providing plaintiffs with a path to collect damages from third parties where damages from directors (and their insurers) would not be available. And where breaches of duty of loyalty are implicated, buyer is likely to provide deeper pockets for recovery than any individual fiduciary, especially given limits on insurance that may exist in respect of such claims.
Most recently, In re Mindbody, Inc. Stockholder Litigation, the buyer, Vista Equity Partners and associated entities (“Vista”) were unable to have an aiding and abetting claim against them dismissed where their “knowing participation” (taking all well-pleaded factual allegations in the complaint as true and drawing all reasonable inferences in favor of plaintiff) consisted of not correcting the proxy disclosure of target on two points found by the Chancery Court to potentially constitute material omissions. Given what seems to be a potential trend in Delaware cases, and given that buyers typically have very limited involvement in target’s disclosure, it is worthwhile reviewing how Vista found itself in the position of potentially being liable for failing to correct target’s disclosure.
The first disclosure breach resulted from the failure of target to “include sufficient detail in the Proxy . . . regarding [the CEO’s] early interactions with Vista.” Specifically, the court found that target failed to disclose that 1) the CEO had met with Vista to discuss his own “goals” (as opposed to the goals of the Company), 2) the CEO had attended presentations highlighting the wealth of Vista’s portfolio company CEOs and “interacted privately on numerous occasions with Vista” and Vista’s portfolio company CEOs, and 3) Vista’s offer letter contained language (not unusual in offer letters) noting that Vista was impressed with target’s management team and looked “forward to forming a successful and productive partnership with them going forward.” The court found a “contractual hook” supporting the allegation of Vista’s “knowing participation” in this first disclosure breach – namely, the language in the merger agreement entitling Vista to review target’s proxy, and obligating Vista to inform target of material disclosure deficiencies. This, in the eyes of the court, created an obligation on the part of Vista to “participate” in the proxy disclosure. The second disclosure breach resulted from target’s failure to disclose favorable preliminary revenue results, where the court found that target’s attorneys had drafted a press release announcing the results and emailed the draft press release to Vista asking for its “thoughts”. Vista raised concerns, and target then decided not to disclose the results. Because the disclosure of the results might have made it more difficult to obtain shareholder approval of the transaction, the court found a “reasonable inference” that target declined to disclose the results “at Vista’s request.”
The striking aspect of this decision is the responsibility it places on buyer for target’s disclosure – a matter over which buyer typically has very limited input, much less control.
It is true that if buyer has reason to believe that target’s disclosure is so deficient that it is likely to attract a securities law claim, target will get a large dose of buyer’s views on the topic. It is also true that buyers often wonder if the sales process being run by the target board is sufficiently disciplined, knowing that a shoddy process can result in liability for the target – liability buyer will indirectly bear if it emerges as the winning bidder. Certainly, there would be heightened concern if buyer had evidence that the CEO was engaging in a breach of his fiduciary duties or was hiding information from the board, and buyer’s approach to target’s disclosure would presumably become more assertive if such evidence appeared. The rub is that buyers are not typically privy to communications between a CEO and board regarding process matters, so that much evidence of a poorly run process may be hidden from buyer’s view.
The court, on the other hand, even at the motion to dismiss stage will have a much fuller view of the sales process. If the preliminary record shows that the CEO, the company’s bankers, and/or board may have been hiding information from shareholders, then, viewed with that knowledge, detailed disclosure regarding the CEO’s meetings will of course seem more material – whereas the same disclosure in the context of a well-run process might seem less critical. The court, however, will not necessarily know at that stage in the proceedings whether the buyer was (a) at an informational disadvantage or (b) colluding with the breaching fiduciaries. If it is “reasonably conceivable” that the buyer was colluding, then the court will find a “reasonable inference” of actual collusion, and the case will proceed. So, from a practical perspective, how can buyer put itself in a position to make the possibility of its “knowing participation” less conceivable? In other words, how can buyers avoid being surprised by an aiding and abetting claim?
First, simply assuming that the board is running a disciplined process may be somewhat dangerous. If buyers are not allowed to assume that a CEO is reporting all contacts with bidders evenhandedly to the board, and discussing with bidders only what the board wishes the CEO to discuss, it may be best for buyers to institute the sort of limitations on contacts with the management that a board will often dictate on its own. In other words, no management meetings with buyer that are not supervised by target’s bankers, and no discussing future employment, management roles, compensation or rollovers until after the board has notified buyer that those topics are fair game (presumably after price and other material terms are determined). Buyer should keep a formal log of all contacts. It obviously puts buyer in an awkward position to be enforcing a protocol not expressly dictated by the board, but target bankers can sometimes be helpful explaining the advantages to all involved of following these steps.
Target bankers can also be helpful as information conduits. If buyer feels that there may be gaps in communications between target management and board, communicating to the board through target bankers is generally much more acceptable than calling board members directly. In order for target bankers to be helpful however, buyer will have to avoid entanglement with bankers, particularly on the financing side, so that the banker’s loyalties do not come into question. (See, In re Rural Metro Corp.)
Moreover, in one of last year’s cases, the court found a reasonable inference that target’s banker itself withheld information from the target board and tipped buyer regarding another bidder’s bid. While it is not all that uncommon for bankers to play bidders off of one another, and to make it appear as if they are granting special favors and encouragement to particular bidders (even in situations where all credible bidders are receiving the same “favors” and encouragement), these cases should put buyer on notice that any special favors should be looked at carefully, and, if there are grounds for believing the bidder is actually being favored in some substantive way for the selfish reasons of the banker or management, buyer should seek to confirm that the favor has been granted with board approval.
Finally, to eliminate the “contractual hook” relied on by the courts in both Mindbody and In re Columbia Pipeline Group, Inc., the merger agreement’s covenant to correct target’s disclosure could be written to limit buyer’s obligation to participate in target’s proxy disclosure to providing target with information only about buyer itself – such that any disclosure required to be made regarding meetings held with target management, the terms of preliminary offers made to target and judgments regarding the materiality of any other information in the possession of target (such as projections) would be the sole responsibility of target. This should have the effect of requiring some showing that buyer actually knew of the fiduciary’s breach, as plaintiffs will not be allowed to rely on the breach of the information covenant to demonstrate “knowing participation” in the fiduciary breach.
Aiding and abetting cases are not going away. While every deal will present different issues, it would serve buyers well to find ways to limit the circumstances in which they may be required to litigate these claims beyond a motion to dismiss.
 Morgan v. Cash, 2010 WL 2803746, at *8 (Del. Ch. July 16, 2010).
 In re Columbia Pipeline Group, Inc. Merger Litigation (Del. Ch. March 1, 2021)
 See In re Mindbody, Inc. Stockholder Litigation (Del. Ch. November 29, 2021), Firefighters’ Pension System of Kansas City v. Presidio, Inc. et al (Del. Ch. January 29, 2021) and In re Columbia Pipeline Group, Inc. Merger Litigation (Del. Ch. March 1, 2021)
 The significance of the “contractual hook” seems to be found in Vice Chancellor Laster’s recitation from the Restatement (Second) of Torts in In re Columbia Pipeline Group, Inc. Merger Litigation (Del. Ch. March 1, 2021). The restatement has 3 separate tests for finding a defendant to be secondarily liable for the tortious conduct of another. Two of those tests would require that buyer actually know of the breach of fiduciary duties by target’s CEO/board/bankers. The third does not require such knowledge if buyer has breached its own duties to target and in doing so substantially assisted target’s representatives in their breach of fiduciary duties. Accordingly, the “contractual hook” seems to serve as a substitute for knowledge of the breach by target’s representatives.