Addressing motions to dismiss in connection with the acquisition of Zale Corporation by Signet Jewelers, Vice Chancellor Parsons (in In Re Zale Corporation) dismissed claims against the Zales directors (under DGCL §102(b)(7)) and Signet, but denied dismissal of claims against Zales financial advisor.  Based on the allegations in the plaintiffs’ complaint, before being engaged, the financial advisor told the Board it had “limited prior relationships and no conflicts with Signet,” even though it had received approximately $2 million in fees in the year before the merger agreement.  More significantly for the Court, the complaint alleged that the financial advisor did not disclose – until after the merger agreement was signed – that it had made a presentation to Signet advocating a purchase of Zales shortly before Signet approached Zales, and that a senior member of the team that presented to Signet later became a member of the team that advised Zales.

The Court found that various alleged conflicts on the part of the Zales directors did not constitute breaches of loyalty, and that the plaintiffs had not alleged bad faith as a result of fairly standard challenges (e.g., price was too low, unfavorable deal protection provisions).  Thus, the Court dismissed the claims against the directors in light of the exculpation provisions of DGCL §102(b)(7).

The court then analyzed the alleged breach of duty of care by the directors because, while not relevant to the claims against the directors in light of 102(b)(7), the analysis was relevant to the aiding and abetting claim against the target’s financial advisor.  Interestingly, the Court found that even though the directors did not know that a senior member worked on both teams, it was “reasonably conceivable that the Director Defendants did not act in an informed manner” – that, at the pleading stage, it could be alleged that the board could have done more to find out about potential conflicts, including (i) negotiating for representations and warranties in the engagement letter or (ii) asking probing questions about past interactions between its financial advisor and known potential buyers (including whether its financial advisor had made presentations to any potential buyers about Zales).  The court also relied on the fact that, at least as alleged, the Zales board did not consider any other financial advisors and acted quickly in deciding which financial advisor to hire.  The decision confirms, after the PLX Technology decision, the need for boards to comprehensively consider potential conflicts of advisors, both before retention and as the sale process unfolds.

Finally, the court allowed the aiding and abetting claim against the financial advisor to go forward, finding sufficient allegations at the pleading stage of (i) “knowledge” of the underlying breach of duty of care because a senior person was allegedly a member of both teams, and (ii) “participation” in the breach because the financial advisor allegedly delayed disclosing the conflict until after the merger agreement was signed.  The court said that “had [it] disclosed the conflict before being engaged by the Board, it would have mooted any claim that the Board breached their duty of care by not taking further steps to discover or remedy such a conflict.”