In In re Columbia Pipeline Group, Inc. Merger Litigation, C.A. No. 2018-0484-JTL, the Delaware Court of Chancery allocated liability among two sell-side officers and a third-party acquirer under the Delaware Uniform Contribution Among Tortfeasors Act (DUCATA). Following a settlement by the target officers and a post-trial finding of liability on the acquirer, the court allocated 50% responsibility to the acquirer for its knowing participation in the target officers’ breaches of fiduciary duty during the sales process and allocated 42% responsibility to the acquirer for its involvement with breaches of the duty of disclosure. Among other things, the court’s allocation of responsibility rejected the acquirer’s argument that it was less culpable than the target officers because it merely breached contractual obligations and was not a fiduciary, thus clarifying that Delaware law does not prioritize fiduciary duties over contractual obligations.
The underlying dispute concerned the sale of Columbia Pipeline to TC Energy Corp. (TransCanada) for $25.50 per share in cash, which prompted several lawsuits from Columbia Pipeline stockholders. One suit alleged the target officers breached their fiduciary duties by pursuing the transaction at an unfair price in their own self-interest and by making misleading disclosures in Columbia Pipeline’s proxy statement. The stockholders also alleged corresponding claims against TransCanada for aiding and abetting the target officers’ breaches of fiduciary duty.
The target officers settled the claims against them before trial for $79 million. The stockholders continued to trial against TransCanada and were awarded noncumulative damages of $1 per share ($398,436,581 in total) for sales process claims and $0.50 per share ($199,218,290.50 in total) for disclosure violations. The court found that TransCanada aided and abetted the target officers’ breaches of fiduciary duties by cultivating a relationship with the officers in violation of a don’t-ask-don’t-waive standstill, inducing the officers to disclose confidential information—thus allowing TransCanada to secure advantages not shared by other bidders—and trapping Columbia Pipeline during the final phase of the deal into accepting a lower bid on threat of public announcement that transaction discussions with TransCanada had terminated.
Following trial, TransCanada sought to minimize its liability under DUCATA, claiming a lesser degree of culpability compared with the target officers. DUCATA is implicated where a plaintiff recovers damages after previously releasing some, but not all, joint tortfeasors. In this case, under DUCATA, TransCanada would be entitled to a credit against its liability equal to the greater of the target officers’ $79 million settlement amount or the proportionate share of damages for which the target officers were responsible. The court therefore determined the relative degrees of fault for the target officers and TransCanada.
With respect to the sales process claim, the court rejected TransCanada’s argument that the target officers should bear a larger proportion of the blame because they were disloyal fiduciaries while TransCanada was a contractual counterparty found to have breached contractual obligations rather than fiduciary obligations. The court explained that TransCanada was liable for its knowing participation in the target officers’ breaches of fiduciary duty and not for breaches of contract. The court further emphasized that Delaware law does not regard a contractual breach as less culpable than a fiduciary breach. Indeed, the court examined decades’ worth of key Delaware precedent—Smith v. Van Gorkom (1985), QVC Network Inc. v. Paramount Communications Inc. (1994), Omnicare, Inc. v. NCS Healthcare, Inc. (2003), and C & J Energy Services, Inc. v. City of Miami (2014)—to reinforce that fiduciary duties do not override binding contractual commitments. Accordingly, the court allocated 50% responsibility to TransCanada and 50% responsibility to the target officers, thus entitling TransCanada to a $199,218,290 credit under DUCATA.
With respect to the disclosure violations, the court held that the buy-side and sell-side both had disclosure obligations because each side knew different facts. The allocation of responsibility was therefore dependent on the level of knowledge about the disclosed information. Ultimately, the court determined that TransCanada bore 42% responsibility for the seven disclosure violations and was entitled to a $115,546,608 credit—equal to the 58% allocation of responsibility borne by the target officers. TransCanada’s liability was therefore reduced to $83,671,682.
Because the damages awarded to Columbia Pipeline’s stockholders were noncumulative, the court held that TransCanada was only liable for the larger of the two sets of damages awards as limited by DUCATA. Thus, TransCanada’s liability was set at $199,218,290.
The Columbia Pipeline decision highlights the significance and interplay of fiduciary and contractual obligations in transactions. Delaware law does not regard a contractual breach as less culpable than a fiduciary breach. To the contrary, binding contractual commitments trump fiduciary duties. Indeed, ubiquitous “fiduciary out” provisions are bargained for contractually because default Delaware law does not afford fiduciaries the right to breach a valid and binding contract. Although fiduciaries have the power to authorize a breach of contract as a valid exercise of their fiduciary duties, e.g., as an efficient breach, such power does not absolve the company from liability for that breach. The Columbia Pipeline decision is also a helpful for acquirers and sell-side advisors from a litigation and risk assessment perspective. In addition to the risk of exposing themselves to claims for aiding and abetting breaches of fiduciary duties during a sale process, acquirers and sell-side advisors should be aware that the monetary amount of their liability may be equal to the liability of sell-side fiduciaries, especially where the sell-side fiduciaries appear to be interested in the transaction and no special committee has been formed.
*Mia L. Banks, a summer associate at McCarter & English not yet admitted to the bar, contributed to this alert.
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