Board directors are increasingly facing scrutiny and liability for failures to meet their fiduciary obligations to shareholders. These duties include duties of care and duties of loyalty. As directors and officers’ insurance policies become more expensive and provide more exclusions and less coverage, outside directors such as investor fund designees are facing a new reality of personal liability exposure.
We will have some future posts on this topic as it relates to fund board designees but a recent case in Delaware reminds us that advisors to the board can face liability for aiding and abetting breaches of fiduciary duty by the board of directors that they advise. In the case of In re Rural Metro Corp. Stockholders Lit. (Del. Ch. March 7, 2014), the Delaware chancery court focused on the M&A advisor’s conflicts of interest and its failures to disclose these conflicts to the board. The conflicts of interest related to the advisor’s efforts to participate in the financing of the sale of the company as well as the financing of the sale of a competitor company in a contemporaneous sale process.
Without getting too much into the specific facts of the case, when advisors have a vested interest in seeing a closing occur (as opposed to helping the company reach a wise resolution), they can cross a line where the advice they provide is incomplete–and even misleading. In this case, the board seems to have relied on this advice but not taken reasonable care to evaluate the advice.
The advisors thereby aided and abetted the breach of fiduciary duties by the board. While a proper focus is now placed on director fiduciary liability, advisors are well advised to consider this exposure as it relates to their own services.