Culpable Participation in Fiduciary Breach

Deborah DeMott is David F. Cavers Professor of Law at Duke Law School. This post is based on a forthcoming article by Professor DeMott. This post is part of the Delaware law series; links to other posts in the series are available here.

To instigate a fiduciary’s breach of duty or otherwise participate in that breach constitutes a tort when the action is done purposefully or knowingly and causes injury to the beneficiary of the fiduciary duty. This proposition of accessory liability is well settled in tort doctrine but not prominent in prior scholarship in the United States. To some observers, it was jarring when this component of tort doctrine was applied in recent years to investment bankers who serve as advisors to target boards in M&A transactions. In particular, the tort became newly prominent when the Delaware Supreme Court underlined its potential impact in late 2015 by affirming a $76 million judgment against an M&A advisor in RBC Capital Markets v. Jervis, an action brought by the target’s former shareholders. In my article I explicate the elements of the tort and situate it within the broader landscape of contemporary tort law. From this perspective, the outcome in RBC Capital Markets stems from the application of settled law, not doctrinal innovation. Nor is it novel that the culpability of a target’s directors, premised on gross negligence, is not identical to the advisor’s stance as an intentional tortfeasor. Likewise, it is not novel that an accessory’s liability does not depend on whether the primary wrongdoer will be liable for money damages, as corporate directors typically are not when their conduct amounts to no more than gross negligence.

The article also examines the salience of tort claims when the underlying duty is characterized, not as fiduciary, but instead as an expressly non-fiduciary governance duty created by contract through an entity’s organizational documents, as Delaware law permits for non-corporate entities such as partnerships and LLCs. When a third party instigates or participates in a breach of a non-fiduciary governance duty—for example, when an advisor knowingly manipulates an asset valuation to facilitate a decision-maker’s approval of a related-party transaction—the duty that’s breached by the decision-maker is not a fiduciary duty but one created or imposed by contract. Although relatively untested in application in governance contexts, the tort of wrongful interference with contract is a plausible candidate as a theory of accessory liability.

Like culpable participation in a breach of fiduciary duty, wrongful interference with contract is an intentional tort. Both torts are premised on an actor’s decision to participate, in some fashion, in another actor’s breach of duty. For both torts, liability requires that the accessory actor’s conduct be informed by knowledge of the primary duty or its breach and that the conduct make a causally significant contribution to the wrong suffered by the party to whom the primary actor owes a duty. And both torts underscore the foundational significance of duty in tort law: actors subject to liability on accessory theories do not owe duties that replicate those of the primary wrongdoer to the beneficiary. Accessory actors, by committing intentional torts, breach duties they themselves owe. As a consequence, mere inaction (albeit knowledgeable) is not a basis for these forms of accessory liability.

Framing these forms of accessory liability within tort law more generally helps to illustrate the distinctive forms of wrongdoing that they represent: such accessories intervene in situations—not of their making—in which one party owes another a duty, with the consequence that the party owed the primary duty is left worse off. The accessory actors on whom the essay focuses resemble inversions of rescuers, who gratuitously intervene as strangers to a situation in which another is in peril, with the objective of preventing harm or mitigating its consequences for the person in peril. Accessory wrongdoers, in contrast, knowingly act to cause another to breach a duty and, if they succeed, the person to whom the primary duty is owed is left worse off.

One striking quality of the opinion in RBC Capital is the Supreme Court’s detailed elaboration of the underlying facts, although none of the defendant’s arguments on appeal challenged any findings of fact by the Court of Chancery. The detailed factual narrative undergirds a premise of the Supreme Court’s conclusion that the defendant’s conduct met the scienter requirement essential to accessory liability. Indeed, both the Supreme Court and the Court of Chancery characterized that conduct as “fraud on the board,” through conduct that actively misled the client’s directors to sell the company for less than it was worth and to breach their duties of disclosure to shareholders. The Supreme Court’s opinion also underscores the centrality of duty analysis. The Court of Chancery characterized M&A advisors as “gatekeepers,” which could imply an affirmative duty—likely ranging beyond the terms of any contract between the advisor and its client—to safeguard the client’s interests from negligent conduct by its directors. The Supreme Court disagreed, emphasizing the role of contract in defining the terms under which a client engages an M&A adviser. But the Supreme Court continued: regardless of contractual terms, an advisor has an obligation not to act contrary to the interests of the client’s board of directors by conduct that undermines its own advice. Such an obligation stems from the general duty not to engage in conduct that constitutes an intentional tort, for example through knowingly misrepresentations that mislead the client’s directors. Closely bound as it is to factual specifics, RBC Capital does not delimit the scope of knowing assistance that suffices for accessory liability, leaving open the status of advisor misconduct that falls short of “fraud on the board” but knowingly assists directors’ breaches of duty. In any event, framing the inquiry within contemporary tort law is crucial to understanding applicable principles.

The full article is available for download here.

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