• The Delaware Court of Chancery awarded US$1 per share in damages against an acquiror that knew of, and exploited, conflicts on the selling company’s management team.
• The Court also awarded damages against the acquiror for failing to insist that the target’s proxy statement disclose details about flaws in the sale process.
• Going forward, the Court eliminates the need for stockholder-plaintiffs to prove that stockholders relied on material misrepresentations and omissions in a request for stockholder action, and instead will require defendants to rebut a presumption of stockholder reliance.

The Delaware Court of Chancery penned the latest chapter, on June 30, 2023, in a long-running dispute concerning TC Energy Corporation’s (“TransCanada”) July 2016 acquisition of Columbia Pipeline Group (“Columbia”), holding TransCanada liable for aiding and abetting breaches of fiduciary duty in Columbia’s sale process, and imposing damages upwards of US$400 million.¹ The Court’s 192-page Post-Trial Opinion explains when a buyer’s hard bargaining crosses the line into exploiting a corporate fiduciary’s self-interest or carelessness. The Court also imposed aiding and abetting liability on TransCanada for failing to ensure that Columbia’s proxy was not materially misleading. Last, the decision evolves Delaware law to create a presumption that stockholders in public companies rely on materially misleading proxy statements, placing the burden on defendants to rebut this presumption of reliance.

Background²

In July 2015, Columbia was spun off from NiSource Inc., a large publicly traded utility. Three NiSource executives joined Columbia in the spinoff, including Robert Skaggs, Jr., as Columbia’s CEO and Chair of its Board of Directors, and Stephen Smith, as Columbia’s CFO. Each was granted change-in-control benefits that would earn them significant sums if Columbia were acquired. The executives joined Columbia with an eye towards selling the company, earning the change-in-control payments, and retiring in 2016.

When TransCanada and several other energy companies expressed interest in an acquisition of Columbia, Columbia’s Board made clear that it would not accept offers below US$28 per share. The Board asked potential bidders to sign non-disclosure agreements with “don’t-ask-don’t-waive” standstill provisions that prohibited potential acquirers from seeking to buy the company without the Board’s consent and not asking to waive that prohibition until they received a written invitation from the Board.

The executive leading TransCanada’s outreach, Francois Poirier, was not only a former investment banker and expert dealmaker, but also had a longstanding relationship with Columbia’s CFO Smith. Smith, on the other hand, had no experience with strategic transactions and, as the Court describes, lacked the guile necessary to shepherd Columbia through a competitive bidding process.

Problems arose shortly after Columbia started courting potential acquirors. Unsatisfied with the bids it had received, Columbia’s Board halted the sale process and proceeded with plans for an equity offering. Despite the standstill in TransCanada’s non-disclosure agreement, Poirier immediately called Smith to express TransCanada’s continued interest in acquiring Columbia. A series of backchannel discussions between Poirier, Smith, and Skaggs unfolded across several months, all while other potential acquirors were led to believe that Columbia was not for sale. On several occasions, TransCanada signaled that its range for an acquisition would be US$25 to US$28 per share.

With a deal coming into focus, Skaggs and Smith received approval from Columbia’s Board to enter exclusive negotiations with TransCanada—without disclosing TransCanada’s breach of the standstill to the Board. Meanwhile, Poirier and the bankers advising TransCanada believed that Smith and Skaggs were single-mindedly focused on selling the company and wanted “an exit regardless of price.”³ Accordingly, TransCanada made an offer to purchase Columbia for just US$24 per share, a dollar below the bottom of the range that TransCanada had previously signaled. Smith and Skaggs felt betrayed, and—without consulting Columba’s Board—urged TransCanada to raise its offer to US$26.50 per share. Again believing it had the better hand, TransCanada’s negotiators upped their offer to only US$25.25 per share, telling Columbia that it was TransCanada’s “best and final”— which it was not.⁴ While they desired a quick exit, Skaggs and Smith “would not take a terrible deal” and encouraged Columbia’s Board to reject the US$25.25 offer, which it did.⁵

The next day, TransCanada again initiated contact, again in violation of the standstill, and asked Columbia to make a counteroffer. Skaggs and Smith suggested US$26 per share while noting that Columbia’s Board had not approved that price. TransCanada agreed but stated that its offer would be 90% cash and 10% in stock. Both sides believed they had an agreement in principle at US$26 per share.

Days later, Smith learned that news of the “advanced” negotiations with TransCanada had leaked and the Wall Street Journal was working on a story. Rather than use the opportunity to explore offers from other bidders, Smith and Skaggs convinced Columbia’s Board to renew TransCanada’s exclusivity and prepared a script to rebuff other bidders by presenting hurdles that not even TransCanada had met—and shared that script with TransCanada. TransCanada was surprised that Skaggs and Smith were so committed to a deal that was not even finalized.

With Skaggs and Smith’s unwavering commitment in mind, TransCanada made an offer to acquire Columbia for US$25.50 per share in cash and insisted that Columbia accept the offer within 72 hours or TransCanada, in violation of its standstill agreement, would tell the media that it was cancelling negotiations with Columbia. While Skaggs and Smith privately considered a counter at US$25.75, they did not discuss that option with Columbia’s Board and instead recommended that Columbia accept the US$25.50 offer. Both companies’ boards approved the acquisition and the parties signed a merger agreement on March 17, 2016.

Columbia drafted a proxy statement for its stockholder vote, with Skaggs and Smith each commenting on the document at least ten times. But the proxy failed to mention many of the interactions between Columbia and TransCanada, did not clarify that those contacts violated the standstill, failed to explain why TransCanada had reneged on its offers, and glossed over Skaggs and Smith’s complacency with other bidders.

The merger agreement gave TransCanada the right to review the proxy statement and obligated TransCanada to inform Columbia of any misstatements or omissions that TransCanada identified. Poirier and other TransCanada advisors reviewed the proxy statement but allowed key details about the interactions between the two companies to go unmentioned. In response to Poirier’s suggestion that the negotiation history with Skaggs and Smith was not captured fully in the proxy, TransCanada’s CEO stated, “I am not that worried about it, it is their document.”⁶

Years of litigation ensued, including an appraisal action that went to trial in 2018,⁷ and the filing of this suit in 2018, which was narrowed to name only Skaggs, Smith, and TransCanada as Defendants. The Court denied Defendants’ motion to dismiss⁸ and partially granted Plaintiffs’ cross-motion for partial summary judgment, and Skaggs and Smith settled during discovery for a combined US$79 million. The case proceeded to trial on the question of whether TransCanada was liable for aiding and abetting breaches of fiduciary duty. The Court’s Post-Trial Opinion, finding against TransCanada, followed.

The Court’s Post-Trial Ruling

The Court begins its analysis with an outline of the elements of aiding and abetting liability under Delaware law. To hold a disinterested party liable for aiding and abetting an officer or director’s breaches of fiduciary duty, a plaintiff must show: (1) the existence of a fiduciary duty (which Columbia’s officers and directors owed in this case), (2) the fiduciary’s conduct in breach of that duty, (3) the defendant knowingly participated in that breach of duty, and (4) damages resulting from the breach.

TransCanada Knowingly Participated in Breaches of Fiduciary Duty by Columbia’s Directors and Officers During the Sale Process

The Court first concluded that Plaintiffs had shown a breach of fiduciary duty by Skaggs, Smith and the Columbia Board. According to the Court, Skaggs and Smith breached their duties of loyalty by prioritizing their interest in a guaranteed exit over stockholders’ interests in obtaining the best available price. The Court further determined that Columbia’s directors breached their duty of care by failing to appoint sufficiently qualified and financially disinterested executives to lead the sale process and by ignoring obvious red flags during Skaggs and Smith’s negotiations with TransCanada—including that they stood to make millions more from a sale to TransCanada than if Columbia successfully executed on its business plan.

The Court likewise held that TransCanada knew of these breaches of fiduciary duty during the sale process. As the Court colorfully put it, “TransCanada knew that Skaggs and Smith were breaching their duty of care by acting like a bunch of noobs who didn’t know how to play the game.”⁹ The Court observed that Poirier and TransCanada’s advisors, as experienced dealmakers, knew and acknowledged internally that Columbia’s weak negotiating tactics—including failing to enforce the standstill, ignoring other bids, repeatedly extending exclusivity following news reports of the negotiations, and frequently sharing inside information—were motivated by Skaggs and Smith’s inexperience and desire to sell.

But TransCanada’s knowledge of these fiduciary breaches was not enough to establish liability unless TransCanada participated in those breaches. The Court found TransCanada exploited Skaggs and Smith’s self-interested desire for a payday by formally offering US$25.50 instead of the agreed US$26 per share and threatening to cancel negotiations if Columbia did not accept the lower bid. The Court emphasized it was “[t]hat double cross [that] caused the tower of actions that TransCanada had taken over the preceding months to topple across the line of culpability.”¹⁰ According to the Court, acquirors can avoid this type of liability by complying “with contractual commitments and sale process rules.”¹¹

As to damages, the Court held that US$1 per share would be appropriate, reflecting the difference between the US$25.50 merger price and the value of TransCanada’s rescinded US$26 offer, adjusting for increases in the value of the 10% equity component of that deal. Based on the outstanding shares of Columbia at the time of the merger, this damages award could be over US$400 million.

TransCanada Aided and Abetted Breaches of the Duty of Disclosure as to the Merger Proxy

As with the breaches of fiduciary duty in the sale process, the Court held that Skaggs and Smith breached their duties of loyalty by failing to disclose many of their interactions with TransCanada and TransCanada’s breach of the standstill agreement, and Columbia’s Board breached its duty of care for the same omissions.

Applying the recent decision in In re Mindbody, Inc. Stockholder Litigation, the Court noted “that an acquirer knowingly participates in a disclosure violation when the acquirer has the opportunity to review a proxy statement, has an obligation to identify material misstatements or omissions in the proxy statement, and fails to identify those misstatements or omissions.”¹² Because the merger agreement gave TransCanada the right to review the merger proxy and the obligation to correct it, the Court found that TransCanada’s failure to do so aided and abetted the disclosure breach. Indeed, the Court states that TransCanada could have “eliminate[d] any risk of liability for aiding and abetting” the disclosure breach by simply raising concerns about the incomplete record in the merger proxy—with the Court going so far as to write out examples of emails TransCanada could have sent. But the Court is careful to note that “it is not possible to say with certainty what the outcome would have been” if TransCanada had objected to the misleading disclosure, as the result would turn on “how clearly TransCanada asserted its position and the credibility of Columbia’s response.”¹³ At minimum, the Court suggests that TransCanada speaking up on the misstatements and omissions in the proxy, even if Columbia ignored those protests, would have armed TransCanada with a strong defense against knowing participation in the disclosure violation.¹⁴

As to damages for aiding and abetting the disclosure breach, the Court held that “the most persuasive figure is US$0.50 per share.”¹⁵ The Court explained that the valuation evidence and history of negotiations would support damages of up to US$2.50 per share, but Delaware precedent suggested US$0.50 was a good approximation of the increase TransCanada might have made to its price if “stockholders voted down the transaction at US$25.50 per share.”¹⁶ The Court finally considered whether damages for the two aiding and abetting claims were cumulative, concluded they were not, and held that plaintiffs could only recover damages of US$1 per share.

The Court Establishes a New Rebuttable Presumption of Stockholder Reliance on Material Misstatements or Omissions

Last and most important, the Court identifies a new presumption of stockholder reliance based on materially misleading disclosures in connection with a request for stockholder action. Per the Court:

“If corporate fiduciaries [1] distribute a disclosure document, [2] to diffuse stockholders, [3] in connection with a request for stockholder action, and [4] the disclosure document contains a material misstatement or omission, then there is a presumption that the stockholders relied on the disclosures such that individualized proof of reliance is not required.”¹⁷

The Court likens this rule to Corwin v. KKR Financial Holdings LLC,¹⁸ and federal securities-fraud precedent regarding omissions, which the Court explains both operate on the presumption that stockholders rely on a company’s disclosures. Recognizing that because it expressed this new rule at the end of the litigation—and after the parties had operated on the understanding that plaintiffs had the burden of proving stockholders’ reliance—the Court held it would be unfair to apply the presumption of stockholder reliance on merger proxies in this ruling.¹⁹ Accordingly, because Plaintiffs failed to prove reliance at trial, they could not benefit from the Court’s newly expressed presumption—and thus could not obtain the approximately US$3 billion they sought in rescissory damages.²⁰

Conclusion and Takeaways

While TransCanada has announced its intention to appeal the decision, the Court’s Post-Trial Opinion serves as a cautionary tale for acquirors and stresses the importance of a buyer both avoiding the sharp practice of exploiting known conflicts of interest by sell-side negotiators and identifying unflattering details about a sale process for disclosure in a merger proxy. Further, the Court’s shifting of the burden of proof of reliance to defendants creates a stick to the companion carrot of Corwin, which shields most third-party merger transactions (such as the one here) from judicial review when they are approved by an informed, uncoerced vote of a majority of shares unaffiliated with the acquiror—again underscoring the importance of disclosures to the current Delaware legal regime.

1. No. 2018-0484-JTL (Del. Ch. June 30, 2023).
2. The following background and facts come from the Court’s Post-Trial Opinion.
3. Slip Op. at 54.
4. Id. at 61-62.
5. Id. at 62.
6. Id. at 88.
7. See In re Appraisal of Columbia Pipeline Gp., Inc., 2019 WL 3778370 (Del. Ch. Aug. 12, 2019).
8. See In re Columbia Pipeline Gp., Inc. Merger Litig., 2021 WL 772562 (Del. Ch. Mar. 1, 2021).
9. Slip Op. at 144.
10. Id. at 7.
11. Id. at 150.
12. Id. at 165 (citing Mindbody, 2023 WL 2518149 (Del. Ch. Mar. 15, 2023), at *43-44).
13. Id. at 168.
14. One also can envision a scenario where an acquiror’s insistence on disclosures about its engagement in the sale process (even if rebuffed by the target) could shift the Court’s perception from an acquiror exploiting unfaithful fiduciaries to permitted hard bargaining.
15. Id. at 185.
16. Id.
17. Id. at 175.
18. 125 A.3d 304 (Del. 2015).
19. Id. at 177.
20. Id. at 178.