United States: Delaware Court Of Chancery Finds Director Breaches Of Fiduciary Duty And Aiding And Abetting Liability For Activist Investor In Shareholder Class Action Suit

Last Updated: November 22 2018
Article by Richard M. Brand, James Fee, Jonathan Watkins and Stephen Fraidin

Most Read Contributor in United States, December 2018

On October 16, 2018, Vice Chancellor J. Travis Laster of the Delaware Court of Chancery issued a post-trial opinion in In re PLX Technology Inc. Stockholder Litigation, a dispute arising from the August 2014 merger between PLX Technology (“PLX” or the “Company”) and Avago Wireless (U.S.A.) Manufacturing Inc. (“Avago”), now known as Broadcom Inc.  The Court held that PLX’s directors had breached their fiduciary and disclosure duties in connection with the merger, and that Potomac Capital Partners II, L.P. (“Potomac”), an activist hedge fund that pushed for the sale of PLX to Avago, had knowingly participated in that breach.  The Court based its conclusions primarily upon the conduct of the PLX directors, Potomac and its principal, Eric Singer, during both Potomac’s proxy contest and Singer’s subsequent tenure on the PLX Board as the chair of the special committee overseeing the sales process.  Critically, the Court reasoned that Singer, whose conduct was imputed to stockholder Potomac, was a dual fiduciary to PLX’s stockholders and Potomac’s investors, and, as such, had incurable conflicts of interest arising from Potomac’s position that the only viable course of action for the Company was a short-term sale.

This decision is significant because the Court made a theme of director susceptibility or acquiescence to what it termed “activist pressure” the basis for its conclusions that fiduciary and disclosure duties had been breached.  Further, the decision appears to be the first occasion that a Delaware court has determined that a conflict of interest attendant to a breach of fiduciary duty could be present based solely on the Court’s perception that a shareholder director had a short term investment outlook absent any additional factors, such as extra or undisclosed compensation or other improper benefits.


The Failed IDT Transaction

The relevant events began seven years ago, when PLX first began merger discussions with Integrated Device Technology, Inc. (“IDT”).  In April 2012, PLX and IDT signed a merger agreement with a price of $7.00 per share.  PLX’s financial advisor, Deutsche Bank, then solicited competitive bids.  That process resulted in only one proposal, from Avago:  an all-cash deal for $5.75 per share.  The PLX Board declined to pursue Avago’s offer, and disclosed the competing proposal to shareholders.1  PLX and IDT eventually abandoned the transaction after the Federal Trade Commission moved to block the merger on antitrust grounds.

Potomac Acquires a Large Stake in PLX

PLX’s stock price plummeted after the merger with IDT failed, which attracted the attention of Potomac.  After building and disclosing its position in PLX, Potomac’s publicly-stated investment thesis for the Company, as consistently set forth in a letter-writing campaign to the PLX Board and shareholders, was that the Company should be sold promptly, and that its most likely buyer would be the unnamed competing bidder who emerged during the IDT sales process (i.e., Avago).  Singer also personally relayed his position to PLX’s CEO and other executives via voicemail, email, telephone calls, and further correspondence.  In response, PLX’s directors and executives stated that they no longer believed a sale was in the best interests of the Company.

Potomac Launches a Successful Proxy Contest
and Singer Shepherds PLX’s Sale to Avago

In November 2013, Potomac filed a definitive proxy statement that sought to replace three of the eight PLX directors with Singer and two independent candidates.  Once again, Potomac disclosed its view that PLX was ripe for a sale, and it urged the other PLX shareholders to support its candidates on that basis.  Institutional Shareholder Services (“ISS”) endorsed Potomac’s slate, and PLX’s stockholders subsequently approved Potomac’s nominees, who joined the PLX Board on December 18, 2013.

The next day, an Avago executive contacted Deutsche Bank regarding Potomac’s presence on the PLX Board.  At the time, Deutsche Bank was acting as a financial advisor to both Avago and PLX.  The Avago executive told Deutsche Bank that Avago was in a quiet period in connection with a separate transaction, but would be interested in acquiring PLX for about $300 million.  Deutsche Bank relayed these points to Singer later that same day, but Singer did not share this information with the other PLX directors.

Singer subsequently was named by the PLX Board as chair of the special committee overseeing the sales process.  After the conclusion of the quiet period, Avago and PLX began negotiations in May 2014, and announced the Avago-PLX transaction in June 2014.  No competing bidder emerged and, after a vote of the stockholders and the Board, the merger closed on August 12, 2014.

The Litigation

After the announcement of the Avago-PLX merger, plaintiff stockholders alleged the PLX directors had breached their fiduciary duties by approving the merger and breached their disclosure duties in recommending the stockholders approve the merger.  Plaintiffs also asserted claims against Avago, Potomac, and Deutsche Bank, which ultimately served as PLX’s financial advisor for the sale, for aiding and abetting the directors’ breaches of fiduciary duty.  The Court subsequently granted motions to dismiss submitted by Avago and two directors.  After the close of discovery, all remaining defendants except Potomac reached settlements with plaintiffs.  The Court then denied Potomac’s motion for summary judgment and the parties proceeded to trial.

The Opinion

The Court found that the PLX directors had breached their fiduciary duties by, in essence, being “susceptible to activist pressure.”2  The Court specifically contrasted the directors’ defensive representations during the proxy contest with their post-contest agreement to a sale and a sales process conducted by Singer.3  The Court also negatively cited the PLX directors’ inability to put forth a credible explanation for a series of adjustments to the projections PLX used to justify the deal price,4 and their choice to use an investment advisor with a “longstanding and thick” relationship to Avago, the buyer.5  In particular, the Court criticized Singer for concealing from the other directors material information about the sales process that he learned through the investment advisor.6  The Court deemed PLX’s disclosures inadequate on essentially the same grounds, citing Singer’s concealment from the stockholders of the early communication of material information and the misleading disclosures regarding the projection adjustments.7

The Court then considered whether a stockholder could be held liable for the actions of its agent on a board of directors, and concluded that Singer’s relationship with Potomac and “his role in directing and implementing Potomac’s strategy” permitted the attribution of his knowledge and actions to Potomac.8  Delaware law presumes that investors act in their own self-interest, and typically, an investor’s control of a large block of shares is presumed to mitigate divergent interest concerns.  Here, however, the Court reached the opposite conclusion,9 and reasoned that Singer, as a dual fiduciary to both PLX’s stockholders and Potomac’s investors, had incurable conflicts of interest, arising solely from Potomac’s position that the only viable course of action for the Company was a short-term sale.10

After determining liability, the Court considered damages, and concluded that plaintiffs were unable to prove that the sale price was inadequate or that the value of PLX as a standalone company was greater than the deal price.11

Analysis and Key Takeaways

Both activists intending to advocate for the sale of a target and boards facing or defending an activist campaign should take note of the outcome of this case, in which the Court explicitly concluded that fiduciary and disclosure duties had been breached as a result of directors applying or succumbing to what the Court deemed “activist pressure.”12

As a general matter, Delaware law does not require incumbent directors to rigidly adhere to their defensive positions after a proxy contest ends.13  Such a requirement would impermissibly hamper a director in carrying out her fiduciary duties, by preventing her from considering new advice or information.  In this case, the Court made the contrast between the pre- and post- proxy contest conduct of Potomac and the PLX directors the crux of its liability determinations.  Specifically, the Court scrutinized the public statements and positions of Potomac and the PLX Board during the proxy contest, particularly Potomac’s focus on the sale of the Company and repeated threats to sue the directors who questioned its plans,14 and the PLX directors’ responsive representation that it was not the right time to sell.15  The Court then compared these stances with the post-contest conduct of the PLX Board, now including Potomac’s designees, which promptly installed Singer as the chair of the special committee and executed Potomac’s investment thesis—a sale of Avago—as quickly as possible after the expiration of Avago’s quiet period.  The Court also was extremely critical of Singer’s failure to disclose Avago’s indication of continued interest that he learned through its financial advisor, and cited the presence of inconsistent projections,16 poor and post hoc record keeping,17 and the engagement of a financial advisor with a longstanding relationship with the buyer18 as further factors in its conclusion that fiduciary and disclosure duties had been breached as a result of “activist pressure.”

The decision also is notable because it appears to represent the first time that a Delaware court has found a prevailing conflict of interest solely on the Court’s perception that a hedge fund investor held a short-term investment thesis.  This is an unusual result because no additional or aggravating factors were present, such as an extra or gratuitous compensation sought by or given to Potomac,19 and Potomac received the same price per share as every other PLX stockholder as a result of the merger.20  Moreover, Potomac’s investment thesis—a quick sale to provide profits to PLX’s stockholders, including Potomac—was openly disclosed as the sole plank of the platform on which Potomac conducted its proxy contest, which in turn was endorsed by ISS and supported by a majority of PLX stockholder votes.21

Importantly, the Court made clear that it was not announcing a completely new standard governing the attribution of the actions of a stockholder director-designee to the stockholder itself, and that the preponderance of the evidence standard was still firmly in place.22  The Court’s determination that Singer was not a credible witness at trial, particularly with respect to his claim that he considered the pursuit of value enhancement options other than a sale of PLX and his denials of contentious interactions with other directors, as well as the indicia of a poorly managed sales process, also may work to limit the impact of this decision to the facts of the case.  Nonetheless, the decision has the potential to open the door to a new wave of shareholder litigation following sales or change of control transactions initiated by activist investors who obtain board representation, alleging that “activist pressure,” evidenced by a strong investment thesis in favor of a sale, overcame fiduciary and disclosure duties and infected the sales process.

At a minimum, activist investors who succeed in electing designees should be cautioned that Courts prefer to see boards function collegially and professionally, and will take a dim view of incidents of threats or incivility both before and after designees join the board.23  Additionally, should a board determine that a sale of the company is in the best interests of the shareholders, directors must recognize and articulate, early and often, that their fiduciary obligation is to all shareholders, and the activist designee should not be permitted to dominate either the consideration of the issue by the board or, once the decision to sell is made, the process itself.  Finally, the sale of a company is a unique process that requires directors to conform their behavior to high standards of conduct.  It was clear that the Court regarded Singer’s failure to share information with the board as both a very serious mistake and a stain on his trustworthiness, which is the essential quality that a Delaware director must have.


1   PLX Schedule 14D-9, at 1 (June 1, 2012).

2   Post-Trial Op. at 111. 

3   See id. at 110-115.

4   See id. at 93-94.

5   See id. at 106.

6   See id. at 119.

7   See id. at 115-16.

8   Post-Trial Op., at 103, 120, and 121.  

9   Notably, the Court already had signaled to defendants during early motion practice that, by simultaneously holding a seat on the PLX Board and controlling PLX’s largest stockholder, it believed Singer likely faced the dual fiduciary problem identified Weinberger v. UOP, Inc., 457 A.2d 701 (Del. 1983) (holding no dilution of duty of loyalty where director holds a dual fiduciary obligation).  See In re PLX Tech. Stockholders Litig., C.A. No. 9880-VCL, 2015 WL 13501398, at 7 (Del. Ch. Sept. 3, 2015).

10 The Court identified several instances that, in its view, definitively indicated Singer’s, and transitively Potomac’s, divergent interest as a result of this singular focus:  “Singer and Potomac argued vehemently that PLX should be sold quickly”; “Singer’s thesis for investing in PLX depended entirely on a short-term sale to [Avago]”; “[Singer] never prepared any valuation [of PLX]”; and “[Singer] lacked any idea for generating value [other than selling PLX].”  Post-Trial Op. at 103-104. The Court also wrote that after Singer joined the PLX Board he “consistently acted with [the] intent [to sell PLX to Avago],” emphasizing that Singer said the PLX Board was “crazy for turning down $6+ from avago few months ago.”  Id. at 105.  Finally, the Court concluded that Singer “only backed off when he learned that Avago could not re-engage for several months” and “got to a deal within days” when Avago re-engaged.  Id.

11 See id. at 134-35.

12 See id. at 111.

13 Air Prods. & Chem., Inc. v. Airgas, Inc., 16 A.3d 48, 128 (Feb. 15, 2011) (finding no breach where independent slate of directors “changed teams” to agree with incumbents after proxy contest).

14 See Post-Trial Op. at 22-23 (Singer threatening to hold directors personally liable).  One director testified at his deposition that Singer “threatened lawsuits all the time . . . [t]hat was his mode of operation at that point.” Id. at 14, n. 60. 

15 See id. at 23.

16 See id. at 114-15.

17 See id. at 47.

18 See id. at 106.

19 In prior Delaware cases, the Chancery Court has found a divergent interest where a party obtained some sort of side benefit, not merely a return on an investment.  For example, in In Re Southern Peru Copper Corporation Shareholder Derivative Litigation, the controlling stockholder both orchestrated a sale and successfully pursued registration rights to induce the target company’s founding shareholder to agree to sell.  See In re S. Peru Copper Corp. S’holder Deriv. Litig., 30 A.3d 60, 99 (Del. Ch. Oct. 14, 2011).  Similarly, in In re Rural Metro Corporation, Vice Chancellor Laster found that a director and Royal Bank of Canada (“RBC”) aided and abetted the directors’ breach of fiduciary duty in the course of facilitating a short-term sale by, among other things, seeking to secure advisory fees for RBC and additional compensation for the buyer, rather than the best deal for the target.  See In re Rural Metro Corp., 88 A.3d 54, 91, 95 (Del. Ch. Mar. 7, 2014).

20 See Post-Trial Op. at 60, 70.

21 See id. at 29, 31, 35.

22 Post-Trial Op. at 120-21.

23 For example, the Court of Chancery has found overbearing and objectionable behavior by a controlling shareholder to adequately allege an aiding and abetting claim for a breach of fiduciary.  In In re INFOUSA Shareholders Litigation, the Court found that the founding shareholder of the company, Vinod Gupta, breached his fiduciary duty in a “series of related-party transactions and improper benefits allowed to flow to [Gupta] from a board that was dominated and controlled by him” as well as threatening other directors to vote for him in close board elections.  953 A.2d 963, 1002 (Del. Ch. Aug. 13, 2007).

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.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
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
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

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 or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq 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 of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions