United States: The Importance Of Oversight

Recent Trends in Delaware Financial Advisor Liability
Last Updated: December 14 2015
Article by Jeffrey L. Rothschild and John B. Cornelius

The Delaware Court of Chancery recently made a series of rulings that underscore the importance of oversight by directors in performing their fiduciary duty of care, particularly as it pertains to financial advisors and their potential conflicts. The decisions highlight the importance of directors being proactive in overseeing their financial advisors, including by requiring that they identify and address conflicts, as well as avoid creating potential informational deficits that exist or that may arise. The decisions likewise reinforce a concept raised in the recent Rural/Metro decision, namely, that financial advisors must ensure that directors are fully apprised of and able to scrutinize the financial advisor's potential conflicts, or they risk potential liability for aiding and abetting directors' breaches of fiduciary duty. Moreover, these decisions indicate that financial advisors should try to ensure that directors are performing their oversight function, or such financial advisors risk potential aiding and abetting liability. As we discussed in our recent article on the In re Dole Food Company, Inc. Stockholder Litigation decision, the Court of Chancery lauded both the special committee and its financial advisor for their attempts to overcome an informational deficit and support the special committee in performing its fiduciary duties. It is important to note that each of the three decisions discussed below regarded motions to dismiss, where the court must draw all reasonable inferences in the plaintiff's favor and accept all well-pleaded factual allegations as true. As a result, the "fact's" discussed herein should be viewed as allegations accepted as facts for purposes of determining whether to grant a motion to dismiss, rather than facts found by the court after a full trial.

In re PLX Technology, Inc. Stockholders Litigation

In August 2014, Avago Technologies Limited (Avago) acquired PLX Technology, Inc. (PLX) in a $6.50 per share cash merger. A stockholders' suit followed wherein it was claimed, among other things, that the PLX directors breached their fiduciary duties in the way they conducted the sale process and that PLX's financial advisor aided and abetted the directors' breach of their fiduciary duties. According to the plaintiffs, PLX's sale committee failed to ask its financial advisor to update its potential conflicts since an unsuccessful 2012 sale transaction. In addition, the plaintiffs alleged that one day prior to rendering its fairness opinion, PLX's financial advisor disclosed to PLX that it (i) had received over $56 million in fees from Avago in the prior three years (versus only $1 million from PLX); (ii) had positions totaling approximately $250 million in Avago's credit facility and loans; and (iii) was working for Avago at the same time on an unrelated acquisition. On September 3, 2015, Vice Chancellor Laster issued a telephonic ruling in which he declined to dismiss the stockholders' claims against the PLX directors and their financial advisor. The court noted that, among other things, the directors may have failed to uphold their obligation to oversee their financial advisor, including their obligation to properly inquire about the financial advisor's potential conflicts. As a result, the directors may have not adequately identified, understood and addressed their financial advisor's potential conflicts of interest with Avago. The court further found that the financial advisor's disclosure of its current and former representations of Avago precluded dismissal of the claim that it aided and abetted potential breaches of fiduciary duty by PLX's directors, because the financial advisor had reason to know that the PLX directors may have been breaching their fiduciary duties by not having information about the financial advisor's relationships with Avago in time to deliberate and act on that information.

In re Zale Corporation Stockholders Litigation

In an October 1, 2015 decision, Vice Chancellor Parsons permitted a claim that the financial advisor to Zale Corporation (Zale) aided and abetted the breach of fiduciary duties by Zale's directors for failing to adequately and timely disclose its potential conflicts. The transaction in question was the 2014 acquisition of Zale by Signet Jewelers Limited (Signet) for $21 per share. In October 2013, Signet approached certain directors of Zale about a potential merger between the two companies. The day after Signet's approach, representatives of Zale's financial advisor (which had recently served as lead underwriter to Zale, and therefore may have been in possession of confidential information of Zale, but at that point had not been engaged by Zale to assist on the potential merger (although such representatives did not have access to such confidential information and had no knowledge of the approach to Signet)) met with Signet's CEO and CFO regarding a possible acquisition of Zale at a value of $17–$21 per share. In November 2013, Signet made a formal proposal to Zale, and the latter retained the financial advisor to assist it in evaluating the potential transaction. The lead banker to Zale also participated in the Signet meeting. Although the financial advisor had disclosed to Zale its prior work for Signet, it did not disclose to Zale its meeting with Signet until after the deal was announced. Zale's board ratified the financial advisor's conduct and said it did not affect the price negotiations. Nevertheless, Vice Chancellor Parsons found the disclosure untimely and that the plaintiffs sufficiently alleged that the financial advisor "knowingly participated" in the board's alleged breach of its duty of care. As a result, in his initial ruling he did not grant the financial advisor's motion to dismiss.

The day after the initial Zale decision was announced, the Delaware Supreme Court issued its decision in Corwin v. KKR Financial Holdings LLC, in which it held that the vote of an informed majority of unaffiliated stockholders will cause the relevant standard of judicial review to go from enhanced scrutiny to the more deferential business judgment. In response, upon a motion to reargue, the Court of Chancery reconsidered its decision in Zale. Vice Chancellor Parsons found that the stockholders knew of the alleged conflict and approved the deal, meaning the question of whether the directors breached their fiduciary duty of care would be reviewed under the business judgment rule. He further concluded that the directors' conduct did not rise to the level of gross negligence and it was not "reasonably conceivable that the [directors] breached their duty of care." Without the predicate breach of fiduciary duty by the directors, the aiding and abetting claim against the financial advisor was dismissed.

In re TIBCO Software Inc. Stockholders Litigation

In December 2014, Vista Equity Partners V, L.P. (Vista) acquired TIBCO Software Inc. (TIBCO) for $24 per share, or an aggregate equity value $4.144 billion. When the merger agreement was signed in September of that year, however, both parties thought the aggregate equity value implied by the transaction was $4.244 billion – approximately $100 million or $0.57 per share more than what was reflected in the merger agreement. The discrepancy arose from a mistake in the capitalization spreadsheet for TIBCO that double-counted approximately 4 million shares. Vista used the spreadsheet during its bidding process and the financial advisor used the spreadsheet in preparing its fairness analysis. The error was discovered by the financial advisor after the merger agreement was signed but prior to the closing of the transaction. The financial advisor informed both TIBCO's board and Vista of the discrepancy, but despite becoming aware that Vista relied on the inaccurate capitalization table when making its offer, the court found that the financial advisor may not have informed TIBCO's board of Vista's reliance. The financial advisor subsequently reaffirmed its fairness opinion and the board affirmed its recommendation to TIBCO's stockholders (96% of stockholders voted to approve the sale). The plaintiffs alleged that the financial advisor's failure to disclose Vista's reliance was motivated by its desire to protect its $47.4 million fee, almost 99% of which was contingent on the transaction closing. In his October 20, 2015 decision, Chancellor Bouchard found that TIBCO's directors may have breached their duty of care in failing to adequately inform themselves after discovery of the error about "certain basic matters one rationally would expect a board to explore to properly assess its options." This potential breach permitted the aiding and abetting claim against the financial advisor to survive the motion to dismiss. The court found that it was reasonably conceivable from the facts alleged that the financial advisor was "motivated to and intentionally created an informational vacuum" at a critical time, and that in so failing to inform the board, it was reasonably conceivable that the financial advisor knowingly participated in a breach of the board's duty of care. Notably, however, the court dismissed all other claims, including the claim that the financial advisor owed a duty to TIBCO's stockholders.


PLX , Zale and TIBCO each reinforce the principle that boards have an obligation to oversee their financial advisors and affirmatively investigate financial advisors' potential conflicts. In all three cases, the respective boards' alleged breach of fiduciary duties arose from an informational deficit when making decisions to approve the transactions – an informational deficit allegedly created by the failure of the financial advisors to disclose vital information as well as the boards' failure to investigate. In each case, the court concluded that it would not dismiss an aiding and abetting claim against a financial advisor if it was reasonably conceivable that the board breached its fiduciary duties as a result of the informational vacuum created by the financial advisor's non-disclosure.

The PLX and Zale rulings reiterate some of the lessons learned in Rural/Metro, that a financial advisor may be liable for aiding and abetting a board's breach of its fiduciary duty if it fails to timely disclose all of its potential conflicts to a board. In each case, the court found the financial advisor failed to timely disclose the full extent of its potential conflicts, leading the respective boards to approve the transactions without, allegedly, having material information necessary to make an informed decision. At the same time, PLX and Zale also indicate that it may not be enough for a board to simply inquire into whether the financial advisor has potential conflicts, but also to investigate whether the relationships disclosed by the financial advisor are an actual conflict of interest. In Zale, the court suggested that the board would have been served by "asking probing questions" regarding the financial advisor's past relationships and/or by requiring representations and covenants from the financial advisor in the engagement letter. The dependency on the actions of the board to avoid potential aiding and abetting liability reinforce the importance of a financial advisor disclosing to the board all potential material conflicts.

TIBCO , while not dealing with the issue of financial advisor conflicts, highlights the symbiotic nature of the board-financial advisor relationship and the importance of disclosure and investigation thereof. The financial advisor's potential aiding and abetting liability did not stem directly from the error in calculating share amounts but from its alleged failure to disclose to the board that Vista had relied on the incorrect calculations in making its offer to purchase and the board's alleged failure to appropriately investigate the circumstances surrounding that error. The board's alleged breach of its duty of care derived not solely from the financial advisor's non-disclosure but from the board's alleged failure to investigate whether the financial advisor "had discussed the [calculation] error or its implications with Vista, or ... whether [the financial advisor] believed Vista should or would pay the full $4.244 billion [price]." The alleged failure of the financial advisor to disclose, compounded by the alleged failure of the board to investigate, led the board to reaffirm its support for the transaction without having all of the facts necessary to make an "informed" decision – a breach of its fiduciary duty of care. The financial advisor, the court concluded, should have recognized that its disclosure failure and the board's investigatory failure would result in a breach of the board's fiduciary duties, and, as such, it was reasonably conceivable that the financial advisor knowingly participated in the board's potential breach.

In light of PLX and Zale (and Rural/Metro), we believe that financial advisors will likely need to implement policies and procedures that will permit them to keep track of past representations and/or pitches that may constitute actual or potential conflicts of interests (or the mere appearance of a conflict) in connection with possible engagements. An unsettled question, however, is what precisely constitutes a pitch (versus ordinary course of business marketing presentations)? The court did not provide an answer, but we believe it will likely look to the following criteria, among others: (i) whether one target was identified or whether many targets were identified; (ii) whether confidential information was exchanged; (iii) whether there was any overlap between those that made the pitch and the deal team; (iv) whether the pitch included a preliminary valuation; and (v) how far back in time the pitch occurred. Financial advisors should also reevaluate their preferred method of disclosing potential conflicts (i.e., in a disclosure letter, in a pitch book, or as an addendum or a representation and/or covenant in the engagement letter), and how often and at what intervals in a transaction process to update the potential conflicts check.

The recent decisions are milestones in the evolution in financial advisor conflict disclosure rules in the Delaware courts, which we believe harken back to In re Del Monte Foods Company Shareholders Litigation in 2011. In that decision, Vice Chancellor Laster enjoined a stockholder vote in part because the court found that the financial advisor to Del Monte, without the board's knowledge, manipulated the sale process to engineer the transaction so as to permit it to obtain buy-side financing fees, and such conflict tainted the sale process. The following February, Vice Chancellor Strine issued the In re El Paso Corporation Shareholder Litigation decision, in which the court found that a financial advisor's disclosed interest was inadequately cabined to fully cleanse its conflict (despite not imposing injunctive relief for the plaintiffs). Two years later, in Rural/Metro, Vice Chancellor Laster found the financial advisor's undisclosed attempts to solicit a mandate from a key competitor in the target's industry at least partially led to aiding and abetting liability for the financial advisor. Most recently, the PLX and Zale decisions further explore financial advisor conflicts, likely spurring financial advisors to more fully consider and possibly disclose (i) fees to adverse parties going back further than two years; (ii) current engagements and recent pitches; (iii) the equity and debt positions held by the financial advisor and its deal teams; (iv) whether such relationships apply to investment banking activities only or whether they extend to other relationships outside of investment banking; and (v) social, economic and family relationships. We believe the Delaware courts will continue to explore financial advisor conflicts and related liability, however, and we suggest financial advisors evaluate how they investigate, consider and disclose conflicts in light of these recent decisions.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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.