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Despite the general rule, a bidder may be liable to the target's stockholders if the bidder attempts to create or exploit conflicts of interest in the board. Similarly, a bidder may be liable to a target's stockholders for aiding and abetting a fiduciary breach by the target's board where the bidder and the board conspire in or agree to the fiduciary breach. An acquirer is free to seek the lowest possible price through arms' length negotiations with the target board, but it may not knowingly participate in the target board's breach of fiduciary duty by extracting terms which require the opposite party to prefer its interests at the expense of its shareholders. Creating or exploiting a fiduciary breach is not part of legitimate arm's-length bargaining; it is an impermissible intrusion into the relationship between the fiduciary and beneficiary.
Defendant board of directors entered into an agreement and plan of merger. Discovery revealed a financial advisor secretly manipulated the sale process to engineer a transaction that would permit it to obtain lucrative buy-side financing fees. Plaintiff stockholders, who were scheduled to vote on a merger, sought a preliminary injunction postponing the vote in order to remedy the taint from a financial advisor's activities. The stockholders asked that the vote be enjoined for a meaningful period (30 to 45 days) and that the parties to the merger agreement be enjoined from enforcing the deal protections during that time.
Did the directors breach their fiduciary duties for purposes of granting injunctive relief?
The court held the stockholders established a reasonable probability of success on the merits of a claim for breach of fiduciary duty against the individual board members. It appeared that the board sought in good faith to fulfill its fiduciary duties, but failed because it was misled by the financial advisor. While the directors might face little threat of liability, they could not escape the ramifications of the financial advisor's misconduct. If the directors had known at the outset of the financial advisor's intentions and activities, the board likely would have hired a different banker. It was impossible to know how the negotiations would have turned out if handled by a representative that did not have a direct conflict. The burden of that uncertainty had to rest with the fiduciaries who created it. Thus, a preliminary injunction was appropriate pursuant to Del. Ch. Ct. R. 65.