United States: Delaware Court Of Chancery Cautions Directors: Be Vigilant In Recognizing Advisor's Conflict Of Interests

Shareholders challenged the merger of Zale Corporation with Signet Jewelers Ltd.

In a decision dated October 1, 2015, the Delaware Court of Chancery credited allegations that the board of directors of Zale breached its fiduciary duty in failing to uncover a potential conflict of interests by its financial advisor, an investment bank that advised Zale in its merger with Signet. In re Zale Corp. Stockholders Litigation, C.A. No. 9388-VSP. Although the court dismissed the claims against Zale's board of directors (the "Board") because of the exculpatory provisions in Zale's charter, the court allowed claims against Zale's financial advisor for aiding and abetting the alleged breach of duty to continue. In its decision, the court reminded boards and their advisors that financial advisor conflicts of interests are not to be taken lightly.


Zale was acquired by Signet in 2014. However, Zale's financial advisor (the "Advisor") on the deal had previously made a presentation to Signet regarding a possible acquisition of Zale, seeking to advise Signet on any such deal, and proposing a specific price range of between $17 and $21 per share for Zale's stock. The same managing director at the Advisor participated in the presentation to Signet and was part of the team that eventually advised Zale.

Zale's Board was unaware of this, and accepted the Advisor's representations that it was unconflicted and that its prior dealings with Signet were "limited."

The deal eventually closed at a buyout price of $21 per share. Plaintiff shareholders filed suit, alleging that Zale's Board breached its fiduciary duties in a number of ways, aided and abetted by Signet and by the Advisor.


As a preliminary matter, Vice Chancellor Parsons rejected plaintiffs' claims that Zale's largest shareholder was interested as to the merger and that material information was omitted from the proxy, and accordingly held that a fully informed and disinterested majority of Zale's shareholders had voted in favor of the merger. Defendants contended that these facts should shift the standard to the more defendant-friendly business judgment rule, but the court nevertheless applied the intermediate Revlon level of scrutiny.

The court also dismissed the claims against the Board members because they largely overlapped with the scope of the exculpatory provision in Zale's charter, which had been adopted pursuant to 8 Del. C. section 102(b)(7). The court held that the Complaint did not assert a breach of the duty of loyalty, and that the directors could not be held liable for breaching their duty of care because such breaches were exculpated. Nevertheless, the court analyzed whether such a breach had occurred, because a breach of the duty of care could still serve as a predicate for claims of aiding and abetting against Signet or the Advisor.

In analyzing the alleged violations of the duty of care, the court dismissed allegations that the Board was conflicted or acted in bad faith with regard to the merger; that it undervalued Zale's stock or agreed to unreasonable deal protections; and that it improperly favored Signet or inappropriately catered to Zale's largest shareholder.

However, the court found that plaintiffs had sufficiently alleged that the Board's reliance on the Advisor breached its duty of care. Although the Board did not learn about the conflict until after the merger agreement was signed, the court reasoned that the Board had a duty to "act[] reasonably to learn about actual and potential conflicts faced by . . . their advisors," and to "act reasonably to identify and consider the implications of the investment banker's compensation structure, relationships, and potential conflicts." Opinion at 50, quoting In re Rural Metro Corp., 88 A.3d 54, 90 (Del. Ch. 2014).

The court suggested that the Board's "oversight duty could include negotiating for representations and warranties in the engagement letter as well as asking probing questions to determine what sorts of past interactions the advisor has had with known potential buyers, such as Signet here." Opinion at 50. Instead of applying that degree of rigor, Zale's Board selected the Advisor without considering any other potential advisors, and "apparently relying without question on the Advisor's representations" that its prior relationship with Signet was "limited." Id. at 51.

In light of the important role that financial advisors typically play in merger transactions, including in the evaluation and negotiation of deal price and related terms, the court further found that the alleged breach of the duty of care here could possibly have caused the shareholders damage. In its presentation to Signet, the Advisor had recommended a purchase price in a range up to $21 per share. Ultimately, the deal price was exactly $21 per share. Accordingly, the court noted that this may have been no coincidence, and that it was at least "reasonably conceivable" that if the Advisor had attempted to negotiate a deal price higher than $21 per share, it could have "undermined both [its own] and Zale's credibility" in the eyes of Signet, by pushing for a price that it had already told Signet was too high. Id. at 52.

On this basis, the court held that although the direct breach of fiduciary duty claims against the Board were exculpated and therefore dismissed, and although the aiding and abetting claims against Signet were also dismissed, the aiding and abetting claims against the Advisor survived.


The Zale decision serves as a warning to financial advisors and to boards engaging financial advisors to carefully explore and seek to avoid conflicts that could impair the impartiality or judgment of the advisor, and that all such potential conflicts need to be disclosed in a timely fashion. Boards should ask probing questions, follow up on simple representations that prior interactions with potential counterparties were "limited," and seek specific representations regarding possible conflicts on the part of their advisors.

This article is presented for informational purposes only and is not intended to constitute legal advice.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.