Delaware Court Of Chancery Cautions Directors: Be Vigilant In Recognizing Advisor's Conflict Of Interests

Shareholders challenged the merger of Zale Corporation with Signet Jewelers Ltd.

In a decision dated October 1, 2015, the Delaware Court of Chancery credited allegations that the board of directors of Zale breached its fiduciary duty in failing to uncover a potential conflict of interests by its financial advisor, an investment bank that advised Zale in its merger with Signet. In re Zale Corp. Stockholders Litigation, C.A. No. 9388-VSP. Although the court dismissed the claims against Zale's board of directors (the "Board") because of the exculpatory provisions in Zale's charter, the court allowed claims against Zale's financial advisor for aiding and abetting the alleged breach of duty to continue. In its decision, the court reminded boards and their advisors that financial advisor conflicts of interests are not to be taken lightly.

Background

Zale was acquired by Signet in 2014. However, Zale's financial advisor (the "Advisor") on the deal had previously made a presentation to Signet regarding a possible acquisition of Zale, seeking to advise Signet on any such deal, and proposing a specific price range of between $17 and $21 per share for Zale's stock. The same managing director at the Advisor participated in the presentation to Signet and was part of the team that eventually advised Zale.

Zale's Board was unaware of this, and accepted the Advisor's representations that it was unconflicted and that its prior dealings with Signet were "limited."

The deal eventually closed at a buyout price of $21 per share. Plaintiff shareholders filed suit, alleging that Zale's Board breached its fiduciary duties in a number of ways, aided and abetted by Signet and by the Advisor.

Analysis

As a preliminary matter, Vice Chancellor Parsons rejected plaintiffs' claims that Zale's largest shareholder was interested as to the merger and that material information was omitted from the proxy, and accordingly held that a fully informed and disinterested majority of Zale's shareholders had voted in favor of the merger. Defendants contended that these facts should shift the standard to the more defendant-friendly business judgment rule, but the court nevertheless applied the intermediate Revlon level of scrutiny.

The court also dismissed the claims against the Board members because they largely overlapped with the scope of the exculpatory provision in Zale's charter, which had been adopted pursuant to 8 Del. C. section 102(b)(7). The court held that the Complaint...