It is generally well settled that shareholders may sue a corporation’s board of directors. When business transactions go awry or in the wake of questionable (or certainly fraudulent) business practices shareholders have standing to sue directors and officers under theories of breach of fiduciary duty and the like. But shareholders may have other targets as well. Many corporations rely upon third-party advisors before making corporate decisions. May a shareholder target financial advisors, accountants, attorneys and other third-party professionals in this scenario? A recent decision suggests that shareholders armed with an “aiding and abetting” theory may sue the professional along with the board of directors.
In the recent decision of In Re Rural Metro Corporation, C.A. No. 6350 VCL (Del Ch. March 7, 2014), discussed here, the Delaware Chancery Court considered whether a financial advisor could be held liable to corporate shareholders. According to the suit, an investment bank advised a board of directors regarding a potential sale of the corporation. Allegedly, the investment bank failed to disclose a conflict that should have prevented it from accepting the engagement. Moreover, the bank did not provide the board with any valuation information until three hours before the meeting to approve the deal. Worse still, the bank allegedly manipulated the valuation metrics. The unreported conflicts of interests and misinformation ultimately caused the sale price of the corporation to drop below fair value.
In the suit that followed, the shareholders sued the board of directors for breach of fiduciary duty. The shareholders also claimed that the bank aided and abetted the directors in breaching their fiduciary duty to the shareholders. The chancery court agreed. The court found that the advisor intentionally acted in a manner that misled the board. According to the court, the proxy statement contained materially misleading disclosures in the form of false information that the bank presented to the board in a financial presentation.
Although aiding and abetting claims are not new, this case has significant implications on many professionals involved in corporate transactions. Professionals including attorneys, financial advisors and accountants are frequently engaged in these contexts to advise boards regarding transactions or on a routine basis. To the extent that a transaction crumbles or when the board engages in misconduct, it is fair to expect that the third-party professional will also be targeted in a shareholder suit. And, to be sure, when a professional engages in intentional wrongdoing like that exhibited here, the law supports a shareholder suit directly against the professional.