May 11, 2016
On May 6, 2016, Weil secured a major victory for its client, Signet Jewelers Limited, in an important decision issued by the Delaware Supreme Court.
The Delaware Supreme Court’s May 6, 2016 unanimous decision in Singh v. Attenborough, No. 645, affirms the Court of Chancery’s dismissal of a case challenging Signet’s $690 million acquisition of Zale Corporation. Singh also confirms the rule set forth in Corwin v. KKR Financial Holdings, LLC, 125 A.3d 304 (Del. 2015), that when a majority of a company’s disinterested, fully informed, uncoerced stockholders vote in favor of a merger with an acquirer that is not the company’s controlling stockholder, the business judgment rule applies to a claim for breach of fiduciary duty against the company’s board of directors and “dismissal is typically the result.” The Singh decision also clarifies that, under these circumstances, claims against the company’s financial advisor for aiding and abetting the directors’ alleged breaches will also be dismissed.
In their complaint, the stockholder-plaintiffs asserted claims for breach of fiduciary duty against Zale’s former directors, alleging, among other things, that four of Zale’s nine directors were conflicted with respect to the transaction and that the board failed to fulfill its duty to obtain the best price for Zale’s stockholders. The plaintiffs also asserted claims against Signet and Bank of America Merrill Lynch for aiding and abetting the directors’ alleged breaches of fiduciary duty. In its initial ruling on defendants’ motion to dismiss, the Court of Chancery dismissed the claims against the former Zale directors, holding that the plaintiffs had failed to allege any non-exculpated claims for breach of fiduciary duty, and also dismissed the aiding and abetting claim against Signet, but declined to dismiss the aiding and abetting claim against Merrill Lynch. In re Zale Corp. S’holder Litig., 2015 WL 5853693 (Del. Ch. Oct. 1, 2015) (“Zale I”). Applying enhanced scrutiny under Revlon, the Court determined that it was reasonably conceivable that Merrill Lynch had knowingly participated in the directors’ breach of their duty of care when the former directors did not learn until after the announcement of the merger that Merrill Lynch had pitched a potential acquisition to Signet before being engaged by Zale.
The day after Zale I was decided, the Delaware Supreme Court decided Corwin, prompting Merrill Lynch to move for reargument. On reargument, the Court agreed that Corwin made clear that the business judgment rule—and not Revlon’s “range of reasonableness” standard of review—applies where a merger is approved by a fully informed, uncoerced vote of disinterested stockholders. In re Zale Corp. S’holders Litig., 2015 WL 6551418 (Del. Ch. Oct. 28, 2015) (“Zale II”). The Court of Chancery then dismissed the aiding and abetting claim against Merrill Lynch. Notably, the Court held that plaintiffs could rebut the business judgment rule by alleging facts sufficient to support a finding of gross negligence, but ultimately concluded the allegations in the complaint were insufficient to support such a finding.
The Supreme Court’s holding in Singh eliminates any ambiguity that may have arisen out of Zale I and Zale II regarding the correct standard of review following approval of a merger by an informed, uncoerced vote of stockholders. Writing for the Court en banc, Chief Justice Strine explained that a “fully informed, uncoerced vote of the disinterested stockholders invoke[s] the business judgment rule standard of review” and insulates the transaction from all challenges other than waste. Singh further states that “because the vestigial waste exception has long had little real-world relevance,” when a stockholder vote invokes the business judgment rule standard of review, “dismissal is typically the result.” Accordingly, the Supreme Court upheld the Court of Chancery’s dismissal of the claims against Zale’s former directors, Signet, and Merrill Lynch on the basis of the fully informed, uncoerced vote by the disinterested majority of Zale stockholders.
The Supreme Court also expressed skepticism that Merrill Lynch’s “supposed instance of knowing wrongdoing—the late disclosure of a business pitch that was then considered by the board, determined to be immaterial, and fully disclosed in the proxy—produced a rational basis to infer scienter[,]” emphasizing that “[n]othing in this record comes close to approaching the sort of behavior at issue in RBC.” In so holding, the Court distinguished RBC Capital Markets, LLC v. Jervis, 129 A.3d 816 (Del. 2015), where the Court held that a financial advisor whose “bad-faith actions cause[s] its board clients to breach their situational fiduciary duties (e.g., the duties Revlon imposes in a change-of-control transaction) is liable for aiding and abetting.”
Weil Securities Litigation practice co-head Joseph Allerhand argued the appeal. The Weil team included Securities Litigation partner Stacy Nettleton and associates Christine Di Guglielmo, David Byeff, and Nikolei Kaplanov.