Court of Chancery Sustains Aiding-and-Abetting Breach of Fiduciary Duty Claim Against Financial Advisor Based on its Conflicts of Interest in Going-Private Transaction
Morrison v. Berry, C.A. No. 12808-VCG (Del. Ch. June 1, 2020)
Even if fiduciary duty of care claims against a target company’s board of directors are exculpated, an aiding-and-abetting claim against a financial advisor to the board may survive a motion to dismiss when the advisor is alleged to have knowingly misled the board and prevented the board from running a reasonable sales process.
The Apollo group of equity investors sought to acquire the Fresh Market grocery store chain in a going-private transaction in conjunction with other large equity holders. Fresh Market relied on its financial advisor, J.P. Morgan, which during its negotiations with Apollo generated downward adjustments to management projections and adjustments to its discounted cash flow analysis that resulted in a lower valuation range for Fresh Market. Apollo had paid J.P. Morgan $116 million in fees in the two years preceding the transaction. Throughout the sales process, Apollo allegedly communicated with its “client executive” at J.P. Morgan to solicit inside information about the bid process and negotiating dynamics. J.P. Morgan’s conflict of interest disclosures to Fresh Market’s board of directors indicated its “senior deal team members” were not currently “providing services” for the members of J.P. Morgan’s Apollo coverage team. The Court agreed with the plaintiffs that one could reasonably infer this disclosure was “artfully drafted” to omit the backchannel communications with Apollo. The Court found it reasonably inferable that Apollo outlasted other potential buyers and was able to acquire Fresh Market due to J.P. Morgan’s assistance.
The Court of Chancery thus held that at the pleadings stage, the plaintiff’s aiding-and-abetting claim against J.P. Morgan was legally sufficient. The Court reasoned that where a conflicted financial advisor has prevented the board from conducting a reasonable sales process, the advisor may be liable for aiding and abetting the board’s breach of fiduciary duties even if the individual directors are exculpated from liability for their breach. The Court explained that while Fresh Market’s directors were exculpated from their alleged duty of care breach of failing to comprehend J.P. Morgan’s conflict of interest, J.P. Morgan could nevertheless still be liable for aiding and abetting their breach of the duty of care based on its misleading statements, which prevented the board from conducting a reasonable sales process.