Shareholders May Recover From the Advisors to a Board of Directors

Shareholders may sue members of corporate boards of directors when they breach their fiduciary duties. These fiduciary duties include the duty of care and loyalty. A recent Delaware Court of Chancery decision allowed a lawsuit against an advisor to the directors. The advisor was determined to have aided and abetted the directors' breach of fiduciary duty in the course of a sale of the corporation (In Re Rural Metro Corporation Stockholders Litigation). Although the legal doctrine of aiding and abetting is not new, this decision is a reminder that third parties outside of the corporation may owe duties to the shareholders.

The Delaware Court in a 92 page opinion reviewed the facts in lengthy detail. In brief summary, the advisor did not disclose conflicts of interests that caused the sale price to be below fair value. The presence of an exculpatory (non-liability) provision in the certificate of incorporation for individual directors was irrelevant in this case because the duty of care applies to the directors as a whole. Part of this duty is to ascertain potential conflicts of interests by outside advisors. The directors settled claims against themselves before trial.

The advisor to the board intentionally acted (scienter) in a manner that misled the directors. General language in the advisor's engagement letter with the board contained vague statements about other clients. This was insufficient to reveal a conflict of interest in this specific transaction. The Court in this case has requested additional financial information to determine the appropriate dollar amount of damages. Doubtless there will be additional legal actions before this case is completed.

A spectrum of professionals including financial advisors, attorneys and accountants may potentially be liable for aiding and abetting the directors' breach of fiduciary duties. A key distinction between this claim and one for ordinary malpractice is the presence of scienter, intentional conduct that goes beyond ordinary negligence. In any situation involving financial loss, shareholders should engage an experienced attorney to determine the potential liability of individuals surrounding and assisting the board of directors.

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