The Delaware Supreme Court this week clarified the “exacting requirements” for proving an aiding and abetting breach of fiduciary duty claim brought against a third-party bidder negotiating at arms’-length. In re Mindbody, Inc., S’holder Litig., No. 484, 2023, 2024 WL 4926910 (Del. Dec. 2, 2024).
The case concerned Vista’s take-private acquisition of Mindbody in 2019. The Supreme Court affirmed the Court of Chancery’s holding that Mindbody’s CEO breached his fiduciary duties by presenting misleading disclosures to stockholders to get the acquisition approved, but reversed the Court of Chancery’s holding that Vista was liable for aiding and abetting those misleading disclosures.
Throughout the opinion, the Supreme Court emphasized that an aiding and abetting claim is one of the most difficult claims to prove, especially when the claim is brought against a third-party bidder negotiating at arms’-length. To prove an aiding and abetting claim in that context, a plaintiff must show both scienter and substantial assistance to the primary actor amounting to participation in that actor’s breach. The participation requirement “protects acquirors, and by extension their investors, from the high costs of discovery where there is no reasonable factual basis supporting an inference that the acquiror was involved in any nefarious activity.” Id., slip op. at 72. The participation requirement also benefits target stockholders “by ensuring that potential acquirors are not deterred from making bids by the potential for suffering litigation costs and risks on top of the considerable risk that already accompanies buying another entity.” Id.
Under this standard, an aiding and abetting claim cannot be based solely on the alleged aider and abettor’s failure to act or passive awareness of the primary actor’s breach. Rather, a plaintiff must show overt participation by the alleged aider and abettor in the breach, e.g., active attempts to create or exploit conflicts at the board level, or evidence that the bidder and the board conspired in or agreed to the breach.
The Supreme Court also addressed language in the merger agreement that obligated Vista to review the proxy disclosures and notify Mindbody if it became aware that any disclosures were materially misleading or incomplete. The Court held that these contractual obligations did not give rise to independent fiduciary duties between Vista and Mindbody’s stockholders.
In reaching this conclusion, the Court emphasized that a different rule would dilute the “exacting requirements” necessary to prove an aiding and abetting claim. The Court also noted that implying such duties based on contractual obligations between merger parties would require the third-party bidder to consider its duties to the target’s stockholders instead of to its own, and would require the third-party bidder to second-guess the materiality determinations and legal judgment of the target’s board of directors, which already owes fiduciary duties.
The decision clarifies the law concerning aiding and abetting claims in the corporate governance context. It also reaffirms the long-accepted rule that “a bidder’s attempts to reduce the sale price through arm’s-length negotiations cannot give rise to liability for aiding and abetting.” Id., slip op. at 72 & n. 78 (collecting cases).
