Can the directors and officers of an acquired company find themselves liable to shareholders of the acquiror? In the case of a typical arm's-length negotiation, the answer is generally no. Under
The case,
A Tiller of the Ground: Misadventures in Electric Cars
Electric Last Mile ("ELM") was founded by
Almost from the beginning, ELMS was plagued by issues and disappointing results, including the resignation of its auditor and the initiation of an
While non-fiduciaries cannot, by definition, breach fiduciary duties they do not have, they can be liable for aiding and abetting a fiduciaries' breaches in some circumstances. The three elements for stating an aiding and abetting claim are "(i) the existence of a fiduciary relationship; (ii) a breach of the fiduciary's duty; and (iii) knowing participation in the breach made by the non-fiduciary."6 This final element, "knowing participation," requires scienter. Plaintiffs must plead specific facts that support an inference that Defendants had actual or constructive knowledge of their participation in a breach.
And the Lord Said, "Where is Thy Disclosure?"
Defendants argued that Luo and Taylor were not alleged by the plaintiffs to have knowingly and actively participated in Forum III's actions or decisions to mislead or omit information in any public disclosures. Certainly, they argued, they did not "conspire in or agree to the fiduciary breach"8 by the Forum III board.
-
Luo and Taylor, based on their management of ELM, had personal knowledge of ELM's internal capabilities and supplier agreements, and thus knew that the proxy contained inaccurate or incomplete information on these points, and
- The projections regarding the future value of the company provided by ELM and included in the Forum III Proxy were so inflated that they supported at least the "plaintiff-friendly" inference that the directors knew the projections were false when made.10
- ELM (though not Lou and Taylor personally) was contractually obligated to check the Proxy for untrue and/or omitted material information,12 and
- Luo and Taylor had strong financial motivations to see the deal close, and those motivations did not align with Forum III shareholders' interests, who would see no loss if the deal fell apart. 13
The court also found that the plaintiffs included sufficient allegations regarding the participation prong. The court reasoned that:
-
Luo and Taylor's active roles in managing ELM and in negotiating and gaining support for the merger supported an inference of participation in the disclosure breaches because they constituted conduct more akin to a "deal affiliate,"11
Footnotes
1. Morgan v. Cash, No. CIV.A. 5053-VCS, 2010 WL 2803746, at *8 (Del. Ch.
2.
3. See id. at *1.
4. Id. at *1-2.
5. Id. at *2.
6. Id. at *2.
7. Id. at *3.
8. Malpiede v. Townson, 780 A.2d 1075, 1097-98 (Del. 2001).
9. See
10. Id. at *4.
11. Id. at *4-6.
12. Id. at *5.
13. Id. at *4.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
Mr
NY 10004
E-mail: Stefanie.gutierrez@hugheshubbard.com
URL: www.hugheshubbard.com/
© Mondaq Ltd, 2024 - Tel. +44 (0)20 8544 8300 - http://www.mondaq.com, source