Knowing participation in a board's fiduciary breach requires that the third party act with the knowledge that the conduct advocated or assisted constitutes such a breach. Under this standard, a bidder's attempts to reduce the sale price through arm's-length negotiations cannot give rise to liability for aiding and abetting, whereas a bidder may be liable to the target's stockholders if the bidder attempts to create or exploit conflicts of interest in the board.
Frederick's of Hollywood ("Frederick's") is a retailer of women's lingerie and apparel. This case centers on the merger of Frederick's into Knightsbridge Capital Corporation ("Knightsbridge") under circumstances where it became a target in a bidding contest. After several rounds of bidding, Frederick's board received a fully financed, unsolicited $ 7.75 cash offer from Veritas Capital Fund ("Veritas"). In light of these developments, the board postponed the Knightsbridge merger in order to arrange a meeting with the two new bidders. Knightsbridge increased its bid to match the $ 7.75 Veritas offer, but on the condition that the board accept a variety of terms designed to restrict its ability to pursue superior offers. On the same day, the Frederick's board approved this agreement and effectively ended the bidding process.
Veritas increased its cash offer to $ 9.00 per share. Relying on (1) the "no-talk" provision in the merger agreement, (2) Knightsbridge's stated intention to vote its shares against third party bids, and (3) Veritas' request for an option to dilute Knightsbridge's interest, the board rejected the revised Veritas bid.
Knightsbridge completed the merger and acquired Frederick. Frederick’s articles of incorporation included an exculpatory provision pursuant to Delaware General Corporation Law (DCL) § 102(b)(7). The provision shield its directors from personal liability provided they have not acted in bad faith or breached their duty of loyalty to the corporation. Disaffected Frederick shareholders (plaintiffs) sued the directors of Frederick. The shareholders' claims alleged: (1) breaches of defendant target corporation's board members' duty of loyalty or their disclosure duties; and (2) aiding and abetting or tortious interference by defendant acquiring corporation. The trial court dismissed the suit for failure to state a claim, ruling that the directors were shielded by the exculpatory provision. The shareholders appealed.
Did the trial court err in dismissing the suit for failure to state a claim?
The Supreme Court ruled that the amended complaint did not adequately allege a breach of the board members' duty of loyalty or their disclosure duty. Also, the exculpatory provision in the charter of the target corporation authorized by Del. Code Ann. tit. 8, § 102(b)(7) operated to bar claims for money damages against the board members caused by the alleged breach of their duty of care. Lastly, the amended complaint did not provide adequate support for the shareholders' claims against the acquiring corporation for aiding and abetting a breach of fiduciary duty by the target corporation's board members or for tortious interference with a prospective business opportunity.