In a case that clarifies a board’s due diligence duties when pursuing an acquisition, B. Riley Financial obtained the dismissal with prejudice of a shareholder derivative suit alleging that its board should have discovered fraud at Franchise Group Inc. before it led a group of investors in the $2.6 billion purchase of the company.
Delaware Vice Chancellor Lori W. Will wrote in her March 30 ruling that B. Riley's directors had no duty to monitor the internal compliance of another company. “This case presents a hindsight critique of a business decision gone awry. The plaintiff seeks to recast an unfortunate investment as a breach of the duty of loyalty,” she wrote. “He does not succeed.”
Franchise Group collapsed in late 2024, roughly 18 months after the sale to the B. Riley-led group. The holding company served as the corporate parent of consumer chains, including Sylvan Learning, the Vitamin Shoppe and Pet Supplies Plus.
“Imperfect diligence on an investment that later sours is a matter of business risk, not bad faith,” the judge wrote. “The complaint acknowledges the existence of functioning oversight mechanisms. … The board’s hiring of financial and legal advisers is the sort of industry-specific compliance approach Delaware law expects.”
The S&C team representing B. Riley included Adam Paris, Diane McGimsey, Sheeva Nesva, Annabelle Spezia-Lindner and Tyler Andrews.