Eric Lovetri
Staff Editor, Delaware Journal of Corporate Law, Volume 50
Introduction
Mindbody and Columbia were the first Delaware opinions to hold acquirors liable for aiding and abetting a target’s breaches of fiduciary duty.[1] Mindbody interpreted “knowing participation” to include “a failure to act or mere passive awareness” where a merger agreement required the buyer to correct material omissions in a shareholder disclosure.[2] Columbia held “constructive knowledge” of a target’s fiduciary breach led to “culpable participation” where a buyer exploited those fiduciary breaches to renege a deal for a better price.[3] Both Cases were appealed.
But in December 2024, the Delaware Supreme Court reversed Mindbody’s aiding and abetting disclosure claim.[4] First, the Court emphasized the knowledge requirement of an aiding and abetting claim requires the aiding abettor to know: (i) of the breaching fiduciaries’ improper conduct, and (ii) that the aiding abettor’s conduct is also improper.[5] Then the Court held that an acquiror’s contractual duty to correct material omissions in a proxy does not create an independent duty of disclosure to the target’s stockholders.[6] But the aiding and abetting claim in the Mindbody case only addressed contractual disclosure requirements.[7] The Court is now poised to address a disclosure and sales process claim through different facts in Columbia’s pending appeal.[8]
Aiding and abetting a breach of fiduciary duty.
Under Delaware law, aiding and abetting the breach of a fiduciary duty has four elements, but the analysis turns on the third party’s knowing participation in the fiduciary’s breach.[9] Knowledge requires proof of scienter.[10] Mindbody II narrowed RBC’s holding that scienter could be satisfied through constructive knowledge.[11] Instead, actual knowledge is required to prove scienter.[12] Participation requires the aiding abettor to have provided “substantial assistance” to the breaching fiduciary by “creat[ing], exacerbat[ing], or exploit[ing] the sell-side breach.”[13]
What happened in Columbia?
In Columbia, two sell-side officers, Skaggs and Smith, sought to trigger their change-in-control benefits through a merger that would enable them to retire the following year.[14] So in September 2015, the officers influenced the Columbia Board to begin a sales process.[15] The process required each bidder to sign a “standstill” non-disclosure agreement prohibiting acts “seeking to acquire the target without the target board’s permission.”[16] TransCanada was a bidder.[17]
An officer of TransCanada, Poirier, violated the standstill by contacting Smith before and throughout the initial sales process.[18] Instead of reporting this violation to the board, Smith fed Poirier information encouraging TransCanada’s purchase of Columbia.[19] In November 2015, Smith told Poirier that Columbia management wanted a deal done by mid-2016.[20] In January 2016, Smith met with and gave Poirier an updated version of Columbia’s information package and set up a daily call with Poirier for due diligence.[21]
The secret communications led to TransCanada bidding far below the breaching fiduciaries’ expectations.[22] Skaggs and Smith responded with a counteroffer of “$26. Not a penny less.”[23] Smith then secretly contacted Poirier again to report the counteroffer had not been approved by the board.[24] TransCanada accepted the $26 deal contingent on two weeks of exclusivity.[25] TransCanada then reneged on the $26 deal and substituted an expiring $25.50 offer.[26] Columbia accepted the offer because TransCanada threatened to publicly disclose a breakdown in negotiations otherwise.[27]
The Court noted, “TransCanada consistently and repeatedly breached the standstill, thereby violating a boundary that the Board had established to protect the integrity of any sale process.”[28] But breaching the standstill was not the basis of TransCanada’s aiding and abetting the sales process liability.[29] Instead, the Court found TransCanada participated in the breaches of Columbia’s fiduciaries by (i) reneging on the $26 Deal; (ii) substituting a $25.50 Offer; (iii) putting “a seventy-two-hour fuse on the offer,” and; (iv) threatening to publicly disclose that talks had ended if Columbia did not accept the offer.[30] The Court reasoned TransCanada’s “confidence” for such exploitation came from the knowledge TransCanada gained from exploiting Skaggs and Smith over the prior four months.[31]
The Court held TransCanada had constructive knowledge that the executives were breaching their duty of care due to the lack of reciprocated sophistication in the bargaining skills.[32] The Court reasoned that experience as a seasoned investment banker allowed Poirier to detect Skaggs and Smith’s signals indicating they were positioned to sell short of their duties.[33] The Court also noted “Poirier admitted that the $25.50 Offer was not TransCanada’s best and final offer, and he agreed that TransCanada would have reconsidered and tried to complete the acquisition . . . [and] admitted that he referred to a public disclosure to put pressure on Columbia.”[34]
The Court identified the seller’s conflict by stating the bidder’s “persistent and opportunistic violations of a process . . . puts the sell-side fiduciaries in a bind, because they must decide whether to sue to enforce the boundary, potentially putting a valuable deal at risk, or lose negotiating leverage by looking the other way.[35] The Chancery Court also analogized TransCanada agreeing to the Standstill and repeatedly violating it as a “customer promising never to enter the store without the owner’s consent, then coming in anyway.”[36] And Poirier building rapport with Smith “like the customer wining and dining the salesman while eliciting confidential information.”[37] But these are both components of arms’ length bargaining.
Conclusion
Mindbody has set the stage for Columbia’s appeal to define the state of acquiror aiding and abetting liability in Delaware. Including constructive knowledge in the acquiror liability analysis would likely chill Delaware’s merger and acquisition prominence. At the very least, transaction costs would increase as acquirers incorporate monitoring a seller’s actions into their liability checklist.[38] A line may need to be drawn between exploitation and aggressive bargaining. But the facts of Columbia lean towards aggressive negotiation because the $26 deal was unauthorized, and TransCanada’s officer had a duty of their own to pursue the best purchase price.[39]
[1] See generally In re Mindbody S’holder Litig. (Mindbody I), No. 2019-0442, 2023 WL 2518149 (Del. Ch. Mar. 15, 2023); In re Columbia Pipeline Grp., Merger Litig., 299 A.3d 393 (Del. Ch. 2023).
[2] See Mindbody I, 2023 WL 2518149, at *44.
[3] See In re Columbia, 299 A.3d at 407 (asserting apparent unsophisticated tactics of the selling officers gave the acquiror put the acquirer on notice that the sellers may be breaching their duties).
[4] In re Mindbody, Inc. S’holder Litig. (Mindbody II), 332 A.3d 349, 402–03 (Del. 2024)).
[5] Id. at 391.
[6] Id. at 402–03.
[7] Mindbody I, 2023 WL 2518149 at *41 (explaining the plaintiffs never asserted that the third-party acquirer aided and abetted the sale-process breaches despite the likely existence of such a claim).
[8] Mindbody II, 332 A.3d at 399 n.117 (noting Columbia is on appeal right now and “addresses similar issues with different facts”).
[9] See Restatement (Second) of Torts § 876 (1979) (explaining aiding and abetting the breach of a another’s fiduciary duty has four elements: (i) the existence of a fiduciary relationship giving rise to a duty owed to the plaintiff; (ii) a breach of a fiduciary duty in that relationship; (iii) the defendants knowing participation in that breach; (iv) damages caused by the breach).
[10] Mindbody II, 332 A.3d at 391.
[11] See Id. at 391; see also RBC Capital Mkts. LLC v. Jervis, 129 A.3d 816, 865–66 (Del. 2015) (explaining “scienter is a factual determination” where an aiding abettor must be shown to have had “actual or constructive knowledge . . . their conduct was legally improper”).
[12] Mindbody II, 332 A.3d at 391 (“[A] plaintiff must also demonstrate that the aider and abettor had actual knowledge that their conduct was legally improper.”).
[13] See In re Columbia, 299 A.3d at 404, 477, 480–81 (“A party who identifies a breach and zestfully exploits it engages in culpable participation.”); see also Malpiede v. Townson, 780 A.2d 1075, 1098 (Del. 2001) (citing Restatement (Second) of Torts § 876 Cmt. d. (1979)) (“If the encouragement or assistance is a substantial factor in causing the resulting tort, the one giving it is himself a tortfeasor and is responsible for the consequences of the other’s act.”).
[14] In re Columbia, 299 A.3d at 404, 410.
[15] Id. at 405.
[16] Id.
[17] Id.
[18] In re Columbia, 299 A.3d at 464.
[19] Id.
[20] Id. at 404–05, 464–65.
[21] Id. at 465.
[22] In re Columbia, 299 A.3d at 466.
[23] Id. at 467.
[24] Id. at 435, 467.
[25] Id. at 467.
[26] In re Columbia, 299 A.3d at 467.
[27] Id.
[28] Id. at 478
[29] Id. (“Without the final act of reneging on the $26 Deal, making the $25.50 Offer, and adding a coercive threat that violated the NDA, TransCanada’s accumulated actions would not have toppled over the line into liability.”).
[30] In re Columbia, 299 A.3d at 451, 477–78 (explaining that TransCanada materially participated in promoting the breach by leveraging the breaches against the fiduciaries contingent upon the merger).
[31] Id. at 478.
[32] Id. at 467.
[33] Id.
[34] In re Columbia, 299 A.3d at 477.
[35] Id. at 479.
[36] Id.
[37] Id. at 479.
[38] In re Columbia, 299 A.3d at 480–81.
Just as a party must be careful that its solicitations of business do not cross the line into tortious interference with a contract or business opportunity, and just as a party must be careful that its pitches do not cross the line into falsehood and libel, so too a party that engages with a fiduciary must be careful about the possibility that the fiduciary may be engaging in breach. Id.
[39] Id. at 405 (“Columbia’s in-house counsel told his TransCanada counterpart that nothing TransCanada was doing implicated the standstill.”).
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