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From Securities Regulation Daily, May 9, 2016

Zales merger opinion upheld, but financial advisors not immune

By Anne Sherry, J.D.

The Delaware Supreme Court added further nuance to the dismissal of claims related to Zale Corporation's merger—including claims against Merrill Lynch as financial advisor. Affirming the chancery court's holding on reargument that the business judgment rule applied, the high court nevertheless noted that the court erred by considering a damages argument. The court also backed away from the chancery court's first opinion to the extent it would insulate financial advisors from consequences of their own bad faith (Singh v. Attenborough, May 6, 2016, Strine, L.).

Vote invokes business judgment rule, not Revlon. Shareholders challenging the 2013 merger between Zale and Signet Jewelers alleged that the Zale directors breached their duty of care and that Merrill Lynch aided and abetted the breach. In its first opinion on the defendants' motion to dismiss last fall, the chancery court applied the Revlon standard of review. Ultimately, it dismissed the claims against the Zale directors, who were protected by an exculpatory clause in the corporate charter, but determined that the complaint stated a claim against Merrill Lynch for aiding and abetting the directors' duty-of-care breaches.

The following day, the state Supreme Court affirmed in KKR Financial Holdings that the fully informed vote of a majority of disinterested stockholders invokes a business judgment rule review in cases in which Revlon otherwise would apply. The decision spurred the chancery court to revisit Zale, and it dismissed the claims against Merrill Lynch.

Error in considering waste claim. According to the Supreme Court, the trial court didn't quite get it right, although it came to the right result. The chancery court should not have considered, for purposes of post-closing damages claims, whether the plaintiffs stated a claim for breach of the duty of care. Even in a change-of-control situation, the damages liability standard for a duty-of-care breach is gross negligence. Zale's informed, uncoerced vote did not change this standard of review. The Supreme Court observed that when a vote invokes the business judgment rule, waste claims are usually dismissed; stockholders are unlikely to approve a transaction that is wasteful.

No immunity for advisors. The court also wrote to "distance" itself from the chancery court's original opinion as to the Merrill Lynch claims. First, it was skeptical that the firm's supposed wrongdoing—the late disclosure of a business pitch that the board ultimately determined to be immaterial and disclosed in the proxy—produced a rational basis to infer scienter. Second, it took issue with the opinion to the extent it purported to hold that an advisor can only be liable if it aids and abets a non-exculpated breach of fiduciary duty.

Delaware's defendant-friendly standard insulates advisors to a high degree by requiring plaintiffs to prove scienter, when most professionals face liability for mere negligence. However, an advisor whose bad-faith actions cause its clients to breach their Revlon or other situational duties is liable for aiding and abetting. "To grant immunity to an advisor because its own clients were duped by it would be unprincipled and would allow corporate advisors a level of unaccountability afforded to no other professionals in our society," the court concluded.

The case is No. 645, 2015.

Attorneys: Seth D. Rigrodsky (Rigrodsky & Long, P.A.) and Carl L. Stine (Wolf Popper LLP) for Ravinger Singh and David Pill. Sandra C. Goldstein (Cravath, Swaine & Moore LLP) and Gregory P. Williams (Richards, Layton & Finger, P.A.) for Neale Attenborough. Joseph S. Allerhand (Weil, Gotshal & Manges LLP) and Bradley R. Aronstam (Ross Aronstam & Moritz LLP) for Signet Jewelers Ltd. Michael J. Maimone (Greenberg Traurig, LLP) and Alan S. Goudiss (Shearman & Sterling) for Merrill Lynch, Pierce, Fenner & Smith Inc.

Companies: Zale Corporation; Signet Jewelers Ltd.; Merrill Lynch, Pierce, Fenner & Smith Inc.

MainStory: TopStory CorporateGovernance DirectorsOfficers FiduciaryDuties MergersAcquisitions DelawareNews

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