Alert December 02, 2014

Thanksgiving-Eve Delaware Chancery Court Decision Refuses to Dismiss Fraud-Based Claims Against Private Equity Investors and Outside Directors

On Thanksgiving Eve the Delaware Chancery Court issued a detailed opinion sure to be of significance to all parties involved in M&A transactions, particularly in the private equity space. In Great Hill Equity Partners IV, LP v. SIG Growth Equity Fund I, LLLP, C.A. No. 7906-VCG (Del. Ch. Nov. 26, 2014), Vice Chancellor Glasscock denied a motion to dismiss fraud claims against four outside directors of Plimus, an e‑commerce payment processing firm, as well as private equity investors, in connection with the sale of Plimus to Great Hill Partners.

The decision, which applies existing Delaware law to the detailed allegations in an amended complaint, is noteworthy because of its discussion of the types of specific allegations of fact sufficient to plead that outside directors and selling investors had knowledge of or assisted in the alleged fraud. Deal lawyers and their clients will want to focus on the importance of answers to written due diligence questionnaires, data room disclosures, and accurate portrayal to potential buyers of a selling company’s business and of senior management’s commitment to the company’s future.

The case is also significant in that the amended complaint relied in part upon the buyer’s access to the sellers’ pre-closing communications with the company’s outside lawyers, made available based on an earlier Chancery Court decision. See Great Hill Equity Partners IV, LP v. SIG Growth Equity Fund I, LLLP, 80 A.3d 155 (Del. Ch. 2013). 

Great Hill is represented by Goodwin Procter LLP, led by senior litigation partner Stephen Poss, along with Delaware counsel at Richards, Layton & Finger, PA.

To read the Delaware Chancery Court’s entire opinion, please click here.