In re PLX Technology Inc. Stockholders Litigation: Delaware Court of Chancery Declines to Dismiss Fiduciary Duty Breach Claims Against Directors and Aiding and Abetting Claims Against Financial Advisor and Significant StockholderSullivan & Cromwell LLP - October 5, 2015
In a recent telephonic ruling, the Delaware Court of Chancery (VC Laster) declined to dismiss claims brought by stockholders against target “independent” directors for demonstrating favoritism toward a sale, for failing to identify and take measures to understand and address their financial advisor’s conflicts and for materially misleading disclosures in a Schedule 14D-9, and against a “dual fiduciary” director for unduly favoring its nominating stockholder by pursuing a near-term sale of the company to the detriment of other stockholders. The Court also held that the late disclosure by the target’s financial advisor of its past and current representations of the winning bidder precluded dismissal of claims against the financial advisor for aiding and abetting breaches of fiduciary duty by the target directors. Finally, the Court found that a significant stockholder’s purported attempt to steer the process towards a sale (imputed by the actions of its nominee on the board) precluded dismissal of claims that it aided and abetted breaches of fiduciary duty by the target directors.
The ruling, which because of its telephonic nature should not be read as literally as a formal written opinion, reinforces several central issues in recent Delaware jurisprudence. It highlights the central importance of proper board process. It makes clear that directors overseeing sales processes must be proactive in identifying and addressing potential conflicts of directors, officers and advisors and in discharging their obligation to obtain the best price reasonably available. Among other things, it demonstrates that indicia of undisclosed or unmanaged conflicts alone may provide the basis for plaintiffs to survive motions to dismiss. It also makes clear that bankers should ensure that boards are apprised of and vet the bankers’ conflicts, or risk being found to have aided and abetted breaches of fiduciary duty by the board. Moreover, it serves as a reminder of the potential for second-guessing the bona fides of projections supplied to financial advisors that are lowered during the course of a sale process.