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Goldman Sachs May Still Be Liable After Board's Fiduciary Duty Breach Exculpated

November 25, 2015
Albert H. Manwaring, IV
Delaware Business Court Insider

Section 102(b)(7) of the Delaware General Corporation Law permits a provision in a company's certificate of incorporation that exculpates directors from monetary liability for breaches of the fiduciary duty of care. By immunizing directors from money damages for breaches of the duty of care, Section 102(b)(7) provisions serve an important purpose in Delaware corporate law to encourage well-qualified people, who may be risk averse, to serve as directors without fear of monetary liability for a duty-of-care mistake. Section 102(b)(7) does not, however, protect officers from duty-of-care violations. Nor does Section 102(b)(7) immunize an aider and abettor from monetary liability for a board's breach of the duty of care—that is even when the board itself is exculpated from such liability. The Court of Chancery recently had the opportunity to address whether a financial adviser may still be liable for aiding and abetting after a board's breach of the duty of care was dismissed under a Section 102(b)(7) exculpation provision in the company's charter.

In In re Tibco Software Stockholders Litigation, C.A. No. 10319-CB (Del. Ch. October 20, 2015), the Court of Chancery held the plaintiff stockholder's amended complaint stated a claim for relief against Tibco Software Inc.'s financial adviser for aiding and abetting the Tibco board's breach of the fiduciary duty of care in connection with a share count error that reduced the expected aggregate deal consideration in the merger of Tibco with a private equity fund. But, because the Tibco board's conduct after discovery of the share count error constituted at most a breach of its duty of care, the court dismissed the plaintiff's duty of care claims against the Tibco board itself under the Section 102(b)(7) exculpation provision in Tibco's charter.

Background

The plaintiff stockholder brought an action challenging the consideration that the private equity fund, Vista, had agreed to pay to acquire Tibco in the merger. The plaintiff did not challenge the propriety of the sale process and conceded that the $24 per share merger price was a "good outcome." The plaintiff took issue, however, with the aggregate equity value of the merger consideration.

Both Vista in the bidding process, and Tibco's financial adviser, Goldman, Sachs & Co., in its fairness analysis, had used a capitalization spreadsheet that double-counted certain Tibco shares, resulting in a mistaken belief by Vista and Tibco that the aggregate equity value was $100 million greater for the merger consideration. The consideration offered by Vista and accepted by Tibco in the merger agreement was not, however, expressed in terms of aggregate equity value, but rather the merger agreement stated the consideration in terms of dollars per share, i.e., $24 per share. This share count error was discovered after the parties executed the merger agreement, and was subsequently disclosed to Tibco's stockholders in a proxy statement before their vote on the merger, which over 96 percent of the stockholders voted to approve despite the error.

But, Vista was apparently willing, at least before the share count error was discovered, to pay $100 million more to acquire Tibco in the merger. Unfortunately, for the Tibco stockholders, the merger consideration was not stated in the merger agreement in terms of aggregate equity value, but rather in terms of price per share, which militated against a claim for reformation.

Goldman Sachs May Still be Liable

The court ruled the Tibco board's alleged failure to make basic inquiries after discovery of the share count error constituted gross negligence in violation of its fiduciary duty of care. The court reasoned that there was a "wide gulf" between what the board actually did, and what the board should rationally have done, after discovering a fundamental flaw in the sale process concerning the share count, which led to a mistaken belief by Vista and Tibco that the aggregate equity value was $100 million greater for the merger consideration. The court explained that the board should have pressed its financial adviser for a complete explanation concerning the share count error, and for its knowledge of Vista's understanding and reliance on the share count error in its final bid in the merger. Armed with this information, the board would have had the information necessary to make an informed and reasoned decision concerning the risks of renegotiating the merger agreement with Vista, pressing Vista for the additional $100 million in aggregate equity value, or whether to change its recommendation before the stockholder vote on the merger. But, because Tibco's board was exculpated from liability for a breach of the duty of care under Tibco's charter, the court dismissed the plaintiff's duty-of-care claims against Tibco's directors.

Turning to the aiding and abetting claims against Tibco's financial adviser, the court ruled that Goldman Sachs may still be liable for aiding and abetting the Tibco board's breach of its duty of care. Section 102(b)(7) does not extend protection to an aider and abettor for a board's breach of the duty of care. The court explained that even though the board itself was exculpated from duty-of-care liability, its breach of fiduciary duties still served as a predicate for the aiding and abetting claims against its financial adviser. The court found that Goldman Sachs, having served as the primary negotiator with Vista in the bidding process, allegedly concealed critical information from the Tibco board that Vista had indeed relied upon the share count error when it made its final bid in the merger. The court explained that the failure to disclose this material information created an "informational vacuum" at a critical juncture when the board was still assessing its options in response to the share count error to possibly secure from Vista or Goldman Sachs some or all of the $100 million shortfall in the aggregate equity value. The court noted the "powerful incentive" of Goldman Sachs, having 99 percent of its fee contingent on the merger's consummation, to conceal this important information from the board to avoid jeopardizing the merger, or to avoid having the board seek a reduction of its fee. Accordingly, the court concluded that these allegations sufficiently pleaded that Goldman Sachs had aided and abetted the Tibco board's alleged breach of its fiduciary duty of care.

Decision Impact

By withholding critical information in a merger that prevents a board from fulfilling its fiduciary duty of care to make a reasoned and informed decision concerning the deal consideration, financial advisers risk the imposition of significant monetary liability while the board itself may be immunized from such liability under an exculpation provision in the company's charter.

Delaware Business Court Insider  |  November 25, 2015