Buyer Found Liable for Aiding and Abetting Target’s Sale Process Fiduciary Breaches

In a 196-page post-trial opinion, the Delaware Court of Chancery found TransCanada Group Inc. (now, TC Energy Corp.) liable for aiding and abetting fiduciary breaches by Columbia Pipeline Group Inc.’s officers and directors during Columbia’s sale process pursuant to which TransCanada, in 2016, acquired Columbia in a $13 billion merger. The merger price represented a premium of 32% over Columbia’s unaffected market price; the Columbia board was advised by two independent financial advisors; and over 95% of Columbia’s outstanding shares voted in favor of the merger.

Columbia stockholders brought suit claiming that Columbia’s officers and directors breached their fiduciary duties in the sale process, aided and abetted by TransCanada. By the time of trial, the directors had been dropped as defendants and the officers had settled, leaving only TransCanada as a defendant. Vice Chancellor Laster found that: (i) Columbia’s CEO and CFO breached their fiduciary duties—by unreasonably favoring TransCanada in the sale process based in part on their personal desire to trigger their change-in-control benefits and then retire; and by failing to disclose to stockholders in the proxy statement their eagerness for a deal and their solicitude toward TransCanada in the sale process; (ii) Columbia’s directors breached their fiduciary duties—by failing to exercise sufficient oversight of the officers in the sale process; and (iv) TransCanada “knowingly participated” in the breaches—and therefore was liable for aiding and abetting. The Vice Chancellor awarded damages of $1 per share (totaling more than $400 million) to be paid by TransCanada to the former Columbia stockholders.

Key Points

• The decision furthers a recent trend of the court being more receptive to claims that a buyer aided and abetted a target company’s fiduciary breaches that impaired the sale process. Historically, there has been a high bar for plaintiffs to succeed on aiding and abetting claims and such claims have been asserted only rarely. However, this is now the fifth case in recent years (the others being Mindbody (2023), Presidio (2021), Morrison v. Berry (2020), and Rural Metro (2014)), in which the court has found a third-party buyer (or, in Rural Metro, a target’s financial advisor) potentially or actually liable for aiding and abetting the target’s fiduciary breaches that impaired the sale process. In this case, the court found that TransCanada “knowingly participated” in Columbia’s breaches—that is, (a) TransCanada had at least constructive knowledge of the breaches, given Columbia’s blatant and persistent favoritism toward TransCanada and TransCanada’s awareness that Columbia’s officers had a personal conflict of interest; and (b) TransCanada “exploit[ed]” the breaches, when it reduced its offer price at the last minute and made coercive threats.
• However, there is still a high bar to plaintiffs’ success on a claim that a buyer aided and abetted a target’s fiduciary breaches in a sale process. Importantly, the court emphasized that TransCanada would not have aiding and abetting liability but for its having exploited the breaches to try to obtain a better deal for itself. The court stressed the totality of the circumstances, noting that TransCanada did not make foot faults or take a small number of isolated problematic actions, but had “pushed on” the conflicted target officers for months. Then, the reduced offer price and coercive threats “caused the tower of actions TransCanada had taken over the preceding months to topple across the line of culpability.”
• The decision also furthers a recent trend of the court being more receptive to claims that a buyer aided and abetted a target’s breaches of the duty of disclosure. The court found that Columbia’s disclosure was materially false or misleading; that TransCanada knew as much (as the material omissions and misstatements related to TransCanada’s own interactions with Columbia in the sale process); and that TransCanada participated in the breach given that it reviewed the proxy statement (as it was contractually required to do under the merger agreement) but made no comments to correct the omissions or misstatements.
• The court created a new, rebuttable presumption of reliance on proxy materials, which will make it easier for plaintiffs to obtain rescissory damages for disclosure violations. Although the court rejected the plaintiffs’ request for rescissory damages of over $3 billion, building on recent precedent, it established (but, as discussed below, did not apply) a rebuttable presumption that, if a public company provides materially flawed disclosure to stockholders when requesting their vote, the stockholders relied on the disclosure. With this presumption, individualized proof of reliance on the disclosure is no longer required for rescissory damages to be awarded.

Background. Columbia Pipeline was a subsidiary of NiSource Inc. Two executives of the subsidiary—the CEO and Chair, Robert Skaggs, Jr., and Stephen Smith, the CFO (together, the “Officers”)—had lucrative change-in-control agreements with NiSource under which a sale of the company would cause their unvested equity to vest. Because of NiSource’s size, a sale of Columbia would not qualify under the agreements as a change of control of NiSource; but if NiSource spun off Columbia and the Officers went with the new entity, then a sale of the spun-off entity would trigger the change-in-control benefits. The Officers, who were laser-focused on retiring in the near term, engineered a spinoff of Columbia; joined the spun-off Columbia with change-in-control agreements equivalent to what they had with NiSource; and immediately commenced a sale process for Columbia.

Numerous parties indicated interest in acquiring Columbia. The Columbia board authorized management to accept an offer at or above $25.25. TransCanada indicated initial interest in a price range of $25 to $28 per share. After it became evident to the Officers that TransCanada was eager to acquire Columbia and did not have a problem with the Officers retiring in the near-term, the Officers blatantly favored TransCanada in the sale process (including ignoring TransCanada’s standstill agreement while not waiving the other interested bidders’ standstills). Ultimately, TransCanada, having been granted exclusivity, submitted a formal offer of just $24 per share. Columbia rejected the offer, and eventually countered at $26. After it became known that a leak about the deal was about to be published, the parties apparently proceeded based on an understanding that they had a deal at $26. Thereafter, however, as the process was coming to a close, TransCanada reduced its offer to $25.50 and stated that it would disclose the end of negotiations if the offer were not accepted in that timeframe. The Officers recommended the $25.50 deal; and the Columbia board, after receiving fairness opinions at that price, accepted it.

A breach of fiduciary duty suit was filed against the Officers and Columbia’s directors, with an aiding and abetting claim against TransCanada. The court dismissed that case in its entirety (in a decision issued March 17, 2021), finding that Columbia’s disclosure was adequate and therefore Corwin business judgment review applied. At roughly the same time, investors holding Columbia shares worth about $203 million brought an appraisal action challenging the merger price. In the appraisal action, the court found that, for appraisal purposes, the fair value of Columbia’s stock at the time of the merger was equal to the deal price of $25.50 per share. The court also found in that action, however, that Columbia’s proxy statement contained material misstatements and omissions relating to the sale process. The fiduciary litigation then resumed, with the plaintiffs dropping the claims against the former Columbia director but maintaining the claims against the Officers and TransCanada. The court found that the plaintiffs, based on extensive discovery obtained in the appraisal case, had established that Columbia’s disclosure about the sale process was materially flawed. Therefore, Corwin did not apply and the court denied the defendants’ motion to dismiss. During the ensuing pre-trial discovery period, the Officers agreed to settle for payment of $79 million. The suit then proceeded against just TransCanada.

Discussion

The Officers were motivated in part by their personal interests. The court found that the Officers wanted to trigger their change-in-control benefits and retire; and that these personal interests, in part, motivated them to favor TransCanada, at the expense of seeking to obtain the best price reasonably available to the stockholders. (TransCanada had calculated that, under their change-in-control agreements, the Officers would receive an incremental more than $45 million and $13 million, respectively, assuming a sale price reflecting a 20% premium.) The court observed that, in addition to this “direct evidence” of the Officers’ personal interests, the Officers “acted like executives who were thirsty for a sale.”

The Officers’ personal interests led them to take actions in the sale process that were “outside the range of reasonableness.” The court acknowledged that the Officers had rejected TransCanada’s initial offer (of $24 per share) and even had broken off negotiations with TransCanada at certain points. The court also acknowledged that the Officers were “professionals who wanted to do the right thing”; and that, based on their equity ownership, they were like other stockholders in having an interest in obtaining the best price available. But, the court stated, the Officers “also wanted to trigger their change-in-control benefits and retire”—and that conflict “pulled them from the path of propriety and undermined their ability to achieve the best value reasonably available for the stockholders.” While the Officers were not “so conflicted that they would sell at any price,” due to their personal “eagerness” for a deal, “they behaved in ways that undercut Columbia’s negotiating leverage,” and led TransCanada “to sense opportunity,” “to contemplate a bid below their original range,” and, later, to lower the $26 offer and make coercive threats.

The Officers’ sale process decisions were inconsistent with a sell-side effort to obtain the best price reasonably available. For example, the Officers, without board authorization and without treating other bidders similarly:

• continued to engage with TransCanada after the Columbia board decided to shut down the sale process in its early stage, including telling TransCanada that management wanted to sell and that the board would probably authorize resumption of the process in a few months;
• told TransCanada that management wanted to complete a transaction by mid-2016 (the target timing for their retirement);
• told TransCanada that there would be no social issues (as the Officers wanted to retire);
• told TransCanada, in essence, that it would not face competition in the sale process;
• ignored TransCanada’s repeated, “blatant” violations of its standstill agreement;
• repeatedly granted TransCanada exclusivity in the sale process;
• ignored an in-bound inquiry from a second bidder after a leak about the TransCanada talks; and
• late in the process, told TransCanada that the board had instructed management “to get a deal done, whatever it takes,” and that the board had not been involved in the admonition by Columbia’s financial advisor to TransCanada’s advisor that a deal had to get done at “not a penny less” than the $26 price that had been agreed in principle.

TransCanada “knowingly participated” in the sale process fiduciary breaches. TransCanada “recognized in real time” that the Officers seemed “inordinately eager to get a deal done”; were “behaving eccentrically, even bizarrely, for sell-side negotiators”; and stood to receive lucrative change-in-control payments and “had no plans to stick around” after a deal. TransCanada thus “had reason to know that [the Officers] were pursuing their own interests in securing a deal and that the Board was not providing sufficient oversight,” the court concluded. Further, the court found that TransCanada participated in the Officers’ fiduciary breaches by “exploiting” them for its own interest. The “decisive moment,” according to the court, came when TransCanada reneged on the agreement in principle for a deal at $26 per share, lowered its bid, and made the coercive threat about publicly announcing that the negotiations were dead. The court wrote: “TransCanada was only able to make that exploitive move with confidence because…[it] had concluded…that whatever game the Officers might be playing, it was not one in which skilled M&A professionals were maneuvering for the best price. It was rather one in which M&A newbies were going to be happy as long as they got a deal done at a decent price that triggered their change-in-control benefits and allowed them to retire.”

The court awarded $1.00 per share as damages for aiding and abetting the sale process breaches. The court found that, by knowingly participating in the sale process fiduciary breaches, TransCanada caused Columbia’s stockholders to lose the benefit of the agreement in principle at $26 per share (comprised 90% in cash and 10% in TransCanada stock). TransCanada’s stock price had increased between signing and closing such that Columbia’s stockholders would have received $26.50 per share. Therefore, the remedy for the sale process claim was $1.00 per share, “based on the lost value of the alternative transaction.”

Columbia’s disclosure about the sale process was materially flawed. The court stated that, by omitting or mischaracterizing various interactions with TransCanada, as well as other facts, “the Proxy Statement painted a misleading picture” that “prevented stockholders from understanding how receptive Columbia management was to TransCanada’s approaches.” The court noted, in particular, the failure to disclose that: the Officers planned to retire in 2016; TransCanada was told that it would not face competition in the sale process; TransCanada’s contacts with Columbia’s management team violated, and the management team chose not to enforce, TransCanada’s standstill; TransCanada’s $26 bid was not “an indicative offer” (as the proxy statement described it), but a “real offer” (albeit subject to conditions) that Columbia’s management accepted and which led to an agreement in principle for a deal at that price; and Columbia believed that the reasons TransCanada stated for lowering its offer price at the last minute (which were disclosed in the proxy statement) were pretextual.

TransCanada “knowingly participated” in Columbia’s disclosure violations. As is usual, the merger agreement required the buyer to review the target’s draft proxy statement. TransCanada reviewed Columbia’s proxy statement but made no comments. The court stated that “TransCanada knew information that the Proxy Statement failed to disclose,” such as its own “material interactions” with the Officers. By “remaining silent” and “dismissing the Proxy Statement as Columbia’s document,” TransCanada knowingly participated in a fiduciary breach.

As noted above, the court established a rebuttable presumption of reliance by public stockholders on materially flawed disclosure relating to a sale process. The court declined to apply the presumption in this case, however, because the case had been litigated on the premise that reliance would have to be proved, and it would be unfair to TransCanada to change that post-trial when it no longer had an opportunity to rebut the presumption.

The court awarded $0.50 per share as damages for aiding and abetting the disclosure breaches. The court observed that, in previous cases, when public company stockholders had been deprived of their ability to cast an informed vote on a matter affecting their economic interests, the court had awarded monetary damages “equal to a relatively small percentage of the equity value of each share”—about $1 to $2 per share, or 2.5% to 4.7% of the equity value. The court noted a recent such award by Chancellor McCormick, in Mindbody, of $1 per share, which equated to 2.7% of that transaction’s equity value. The court determined to award $0.50 per share in this case, which equated to 1.96% of the equity value. Because damages are not additive, and the sale process damages were higher than and took precedence over the disclosure damages, the stockholders were entitled only to the sale process damages of $1 per share.

Practice Points

• A buyer that is favored by the target in a sale process should be sensitive to the possibility of aiding and abetting liability. As noted, there is a high standard for a plaintiff’s success on an aiding and abetting claim. In addition, a buyer, of course, does not have responsibility for overseeing the target’s sale process or monitoring the target’s fiduciary duties. However, a buyer should carefully consider how to respond if, during a sale process, it receives “tips”; is treated with material favoritism vis a vis other bidders; knows that the target’s negotiators are especially unsophisticated about M&A matters; or knows of other actions by the target’s directors, officers, controlling stockholders, or advisors that are so outside the norm that they, on their face, appear to entail fiduciary breaches or other misconduct in connection with the sale process.
• A buyer should carefully consider the nature and extent of its obligations under the merger agreement to review and/or comment on the target’s draft proxy statement disclosure. Generally, a buyer should comment on material misstatements or omissions relating to the buyer’s own material interactions with the target during the sale process. Even if the target does not accept the comments or make the suggested changes, the buyer will be in a better position to defend an aiding and abetting claim. Also, a buyer should consider seeking to modify the usual merger agreement provision so that it specifies that the buyer is required to comment only on the descriptions relating to material events about which the buyer has direct knowledge, such as its own interactions with the target.
• A board that makes decisions in a sale process that favor (or may appear to favor) a particular bidder should: carefully consider those decisions, articulate the ways in which the board believes that making those decisions will advantage the stockholders’ interests, and document the board’s reasoning therefor. If a director, lead negotiator, key manager, or financial advisor has a personal interest that may conflict with the stockholders’ interest in maximizing the sale price for the company, the conflict should be disclosed to, and addressed by, the board, and ultimately disclosed to the stockholders in the proxy statement. In the context of a sale of the company, the desire of one or more executives to obtain change-in-control benefits and/or to retire should not, in itself, create an insurmountable conflict; however, a board should be vigilant in seeking to ensure that it does not lead to decisions by the board or management that undermine the obligation to seek the best price reasonably available to the stockholders.
• In seeking to obtain the best price reasonably available on a sale of the company, generally, sell-side participants: should not express over-eagerness for a deal; should be led by officers, directors and advisors with M&A experience; should not engage in back-channel communications or give tips to a bidder; and should seek to ensure that the board is informed of all material issues that arise and decisions that are made during the sale process.
• It bears repeated emphasis that if the disclosure to stockholders is adequate, any fiduciary breaches are “cleansed” under Corwin. If not for Columbia’s disclosure violations, notwithstanding possible fiduciary breaches by the Officers and directors, the case would have been dismissed at the pleading stage under Corwin. Thus, proactively addressing in the proxy statement disclosure any potential conflicts and breaches is critical—although these are the very issues that directors and officers may, on a personal level, be the most hesitant to disclose.
• Boards and management should be prepared for challenges to spinco arrangements. Generally, in connection with the spin-off of a subsidiary, the parent can put into place at the spinco whatever arrangements it determines. Columbia Pipeline highlights that, to the extent that directors or officers of the parent become directors or officers of the spinco, there is the possibility of challenges to the arrangements as having been part of a “plan” that they engineered pre-spin—such as, in this case, a transfer of value from the triggering of change-in-control agreements (as the benefits would not have been triggered in a sale of the subsidiary by the parent but were triggered in the merger following the spinoff).