A claim for aiding and abetting a breach of fiduciary duty fails if a plaintiff cannot allege an underlying breach. In that circumstance there is no breach to aid and abet. Where a plaintiff sufficiently alleges a breach, however, it still also must allege, in non-conclusory terms, facts sufficient to show knowing participation in the alleged breach to state a claim for aiding and abetting. In Jacobs v. Meghi, C. A. No. 2019-1022-MTZ (Del. Ch. Oct. 8, 2020), the Court of Chancery parsed the allegations of plaintiff’s complaint to conclude that it had failed to allege “specific facts supporting an inference of knowing participation in a breach” (Id. at 1) and dismissed plaintiff’s complaint against the alleged aider and abettor. As explained below, the Court also denied plaintiff’s claim for unjust enrichment.
This case arose out of a financing transaction in which the alleged controlling stockholder, Oaktree Power Opportunities Fund III Delaware, L. P. (Oaktree), together with a minority stockholder, Ares Management Corporation (Ares), agreed to invest $50 million in a Delaware corporation (the Company), in exchange for newly-issued preferred stock and warrants. Plaintiff alleged that the Company could have received sufficient financing in an alternative transaction with Oaktree and a party other than Ares but that Oaktree used its controlling influence to cause the board to approve the Oaktree/Ares financing. Plaintiff alleged that the Oaktree/Ares financing resulted in a transfer of equity value of $134 million whereas the alternative transaction would have transferred only $60 million for the same $50 million investment.
Court of Chancery Finds a Failure to Plead Knowing Participation in the Board’s Alleged Breach
Critical to the court’s evaluation was that Ares was a bidder. The court recognized Delaware precedent that a bidder who otherwise owes no fiduciary duty is under no obligation to maximize value for the target. The court re-affirmed that “To allow a plaintiff to state an aiding and abetting claim against a bidder simply by making a cursory allegation that the bidder got too good a deal is fundamentally inconsistent with the market principles with which our corporate law is designed to operate in tandem.” (Id. at 18)(citation omitted). Applying this principle the court held that plaintiff had failed to allege that Ares knew about the Company’s process, the role or creation of a special committee the Company formed to negotiate the transaction, or any flaws in the special committee’s negotiations.
Similarly, the court held that plaintiff failed to allege knowledge of Oaktree’s breaches or “to demonstrate that knowledge of Oaktree’s breach could transitively or constructively support knowledge of the [director defendants’] breaches.” Id. at 23. The court held that the mere participation with a known controller in a beneficial transaction does not, without more, demonstrate aiding and abetting liability and that plaintiff had failed to allege that “Ares had any knowledge that Oaktree wrongfully orchestrated and infected [the Company’s] transaction process such that Ares would know the [director defendants] were breaching their duties.” Id. at 25. The court concluded that “Consistent with longstanding principles of law and capitalism, Ares exercised its right to secure for itself a “sweet” deal.” Id. at 29.
The Court Also Dismissed Plaintiff’s Claim of Unjust Enrichment
The court rejected plaintiff’s claim of unjust enrichment for failure to plead an absence of justification, a necessary element of an unjust enrichment claim. The court rejected plaintiff’s assertion that “simply benefitting from another defendant’s wrongdoing is enough to support a claim of unjust enrichment.” Id. at 32. The court’s holding that Ares had participated at arms-length in its negotiations with the Company and the special committee and plaintiff’s failure to plead Ares’ knowing complicity in any breach of fiduciary duty required dismissal of the unjust enrichment claim. The court determined that “equity and good conscience” did not require the court to deprive “an innocent, successful bidder of an arms-length bargain.” Id. at 35.
This case illustrates the care with which a Delaware court will parse a plaintiff’s allegations to determine whether there are specific, non-conclusory allegations sufficient to make it reasonably conceivable that a party knowingly participated in breaches of fiduciary duty. The absence of such allegations will lead a court to reject a claim of aiding and abetting and the same facts that justify that conclusion likely will require dismissal of a claim for unjust enrichment absent additional allegations of wrongdoing.