Can the directors and officers of an acquired company find themselves liable to shareholders of the acquiror? In the case of a typical arm’s-length negotiation, the answer is generally no. Under Delaware law, an arm’s-length bargain is “privileged,” and cannot give rise to liability.1 But, of course, there are exceptions. A recent Chancery Court decision shows how target officers and directors can still find themselves in biblical amounts of trouble.

The case, Electric Last Mile Solutions, Inc. Stockholder Litigation, involves breach of fiduciary duty claims by stockholders of a special purpose acquisition company (“SPAC” in common parlance)—Forum III Merger Corporation. Unusually, plaintiffs sued both the officers and directors of the SPAC and the co-founders and directors of the target company, Electric Last Mile (“ELM”).2 The defendant-officers of ELM, who owed no fiduciary duties to the Forum III stockholders, moved to dismiss the claims against them. Chancellor McCormick denied the motions in a decision that may further embolden already-litigious plaintiffs’ counsel and expand the scope of the parties they seek to sue.

A Tiller of the Ground: Misadventures in Electric Cars

Electric Last Mile (“ELM”) was founded by Jason Luo and James Taylor with the stated goal of transforming the use of electric vehicles in the U.S. delivery market.3 The SPAC, Forum III Merger Corporation (“Forum III”), entered into a merger agreement with ELM in December 2020. The merger was approved by a majority of Forum III stockholders in June 2021, producing a new publicly-traded entity—Electric Last Mile Solutions (“ELMS”).4

Almost from the beginning, ELMS was plagued by issues and disappointing results, including the resignation of its auditor and the initiation of an SEC investigation.5 ELMS filed for Chapter 7 bankruptcy in June 2022, and Forum III stockholder-plaintiffs filed suit shortly thereafter.

Sin Lieth at the Door: Aiding and Abetting the Breach

While non-fiduciaries cannot, by definition, breach fiduciary duties they do not have, they can be liable for aiding and abetting a fiduciaries’ breaches in some circumstances. The three elements for stating an aiding and abetting claim are “(i) the existence of a fiduciary relationship; (ii) a breach of the fiduciary's duty; and (iii) knowing participation in the breach made by the non-fiduciary.”6 This final element, “knowing participation,” requires scienter. Plaintiffs must plead specific facts that support an inference that Defendants had actual or constructive knowledge of their participation in a breach.

And the Lord Said, “Where is Thy Disclosure?”

The ELMS plaintiffs’ claims rest not on the fairness of the merger terms, but on three discrete disclosure issues: (1) allegedly misleading projections prepared by ELM and included in the proxy sent to Forum III stockholders; (2) non-disclosure of supply agreements between ELM and a Chinese manufacturer and of ELM’s internal engineering capabilities; and (3) the failure to properly disclose Luo and Taylor’s acquisition of additional shares in ELM at a discounted price shortly before the merger.7

Defendants argued that Luo and Taylor were not alleged by the plaintiffs to have knowingly and actively participated in Forum III’s actions or decisions to mislead or omit information in any public disclosures. Certainly, they argued, they did not “conspire in or agree to the fiduciary breach”8 by the Forum III board.

Chancellor McCormick disagreed. The court concluded that the allegations included in the complaint—and assumed to be true at this stage of the proceedings—supported the aiding and abetting claim. The court highlighted several allegations that made it “reasonably conceivable”9 that Luo and Taylor knew about the alleged disclosure failings, including that:

  • Luo and Taylor, based on their management of ELM, had personal knowledge of ELM’s internal capabilities and supplier agreements, and thus knew that the proxy contained inaccurate or incomplete information on these points, and
  • The projections regarding the future value of the company provided by ELM and included in the Forum III Proxy were so inflated that they supported at least the “plaintiff-friendly” inference that the directors knew the projections were false when made.10

The court also found that the plaintiffs included sufficient allegations regarding the participation prong. The court reasoned that:

  • Luo and Taylor’s active roles in managing ELM and in negotiating and gaining support for the merger supported an inference of participation in the disclosure breaches because they constituted conduct more akin to a “deal affiliate,”11
  • ELM (though not Lou and Taylor personally) was contractually obligated to check the Proxy for untrue and/or omitted material information,12 and
  • Luo and Taylor had strong financial motivations to see the deal close, and those motivations did not align with Forum III shareholders’ interests, who would see no loss if the deal fell apart. 13

Chancellor McCormick’s decision highlights the risks to non-fiduciary parties in a similar transaction. The case presents the possibility that, in the right circumstances, directors and officers of an acquired company may be liable to the stockholders of the acquiror for disclosure violations where they provided—or failed to provide—information for the acquiror’s proxy materials.

  1. Morgan v. Cash, No. CIV.A. 5053-VCS, 2010 WL 2803746, at *8 (Del. Ch. July 16, 2010); see also In re Frederick's of Hollywood, Inc. S'holders Litig., 1998 WL 398244, at *4 (Del. Ch. July 9, 1998) (“[A]n offeror who conducts arm's-length negotiations leading to an acquisition agreement cannot be said to be knowingly participating in an alleged breach of fiduciary duty by the target board.”). ↩︎
  2. Electric Last Mile Solutions, Inc. Stockholder Litigation, No. 2022-0630-KSJM, 2024 WL 223195, at *1 (Del. Ch. Jan. 22, 2024). ↩︎
  3. See id. at *1. ↩︎
  4. Id. at *1–2. ↩︎
  5. Id. at *2. ↩︎
  6. Id. at *2. ↩︎
  7. Id. at *3. ↩︎
  8. Malpiede v. Townson, 780 A.2d 1075, 1097–98 (Del. 2001). ↩︎
  9. See Electric Last Mile Solutions, Inc. Stockholder Litigation, 2024 WL 223195, at *3. ↩︎
  10. Id. at *4. ↩︎
  11. Id. at *4–6. ↩︎
  12. Id. at *5. ↩︎
  13. Id. at *4. ↩︎