The Delaware Supreme Court’s 2024 decision in In re Mindbody, Inc., Stockholder Litigation and other decisions limited aiding and abetting liability for arms’ length acquirers, holding that an acquirer’s passive failure to correct proxy deficiencies or errors — even with a contractual duty to do so — does not necessarily constitute the “substantial assistance” standard required. However, the Delaware Court of Chancery’s February 2026 decision, In re EngageSmart, Inc. Stockholder Litigation, clarified that sell-side financial advisers may not enjoy the same protection.
The Mindbody Framework
In Mindbody, the Delaware Supreme Court affirmed in part and reversed in part the Court of Chancery’s post-trial judgment arising from an acquirer’s 2019 take-private acquisition of Mindbody, Inc. The Court of Chancery found that Mindbody’s founder and CEO — who was motivated by a need for liquidity, a desire to sell quickly and an expectation of post-merger employment with the acquirer — breached his fiduciary duty of loyalty by tilting the sale process in the acquirer’s favor and permitting material omissions in the proxy materials. The trial court also held the acquirer liable for aiding and abetting the disclosure breach.
While the supreme court affirmed that the CEO breached his duty of loyalty, the court reversed on the aiding and abetting claim against the acquirer, holding that its alleged failure to correct the proxy statement — even in the face of a contractual obligation to flag material omissions — did not constitute “substantial assistance” (a requirement for aiding and abetting liability), because it did not create an “informational vacuum,” as the CEO already knew everything the acquirer knew, and the acquirer took no affirmative action to facilitate the CEO’s breach.
Facts of EngageSmart
EngageSmart was an electronic payments and billing company that was taken public in 2021 by its controlling stockholder, General Atlantic, which held approximately 60% of EngageSmart following its IPO. By 2022, General Atlantic was in need of liquidity as its funds approached the end of their lifecycles. After an initial discussion with the acquirer stalled in 2022, the acquirer re-engaged in 2023, and EngageSmart’s board formed a special committee to consider a potential transaction along with its financial adviser (committee financial adviser). General Atlantic’s longtime financial adviser switched roles to become the company’s financial adviser (company financial adviser). The company financial adviser led the bidder outreach alongside General Atlantic, while it allegedly sidelined the committee financial adviser from bidder communications and process decisions. On Oct. 20, 2023, after being allegedly tipped by the company financial adviser on pricing, the acquirer made a surprise control bid, and following a mere weekend of negotiations, the board approved a multibillion-dollar recapitalization. Public stockholders received $23 per share in cash, while General Atlantic rolled over a portion of its equity for a 35% stake and received a post-closing dividend of approximately $500 million that was not disclosed to the stockholders. Stockholders filed suit in the Delaware Court of Chancery, claiming that the controlling stockholder and the directors breached their fiduciary duties by negotiating and approving a transaction that was unfair to the public minority, which was aided and abetted by the company financial adviser.
Court of Chancery’s Decision and Analysis
The primary question before Vice Chancellor Travis Laster was whether the defendants had properly implemented the “MFW framework,” which would have invoked the much more lenient business judgment rule. MFW requires, among other things, approval of a transaction by a majority of fully informed minority stockholders and the approval of a properly formed special committee comprised of independent and disinterested directors with the full authority to negotiate the potential transaction. The court held that MFW had not been satisfied, explaining that it was reasonably conceivable that the stockholder vote was uninformed due to five categories of material disclosure failures: (1) General Atlantic’s undisclosed liquidity and an undisclosed $500 million post-closing dividend for General Atlantic; (2) an alleged conflict of interests for the company’s financial adviser, disclosed only through “may” language (i.e. stating only that the financial adviser “may” have had business relationships with the acquirer of EngageSmart, when the company financial adviser allegedly did have such relationships); (3) an allegedly misleading portrayal that the committee led the transaction process; (4) an allegedly misleading omission that other firms were evaluating EngageSmart and trying to improve their offers; and (5) a committee member’s allegedly undisclosed ties to General Atlantic and the acquirer through a private equity firm where he is a managing director and which was financially involved with General Atlantic and the acquirer.
Because MFW did not apply, the more stringent “entire fairness” review controlled, and the court found that the claims for aiding and abetting breach of fiduciary duty could proceed. This included an aiding and abetting claim against the company financial adviser, who had served in the sell-side financial advisory role. The court explained that while a third-party acquirer sits on the outside and is expected to bargain in its own self-interest, a sell-side financial adviser is on the inside and expected to help the sell-side fiduciaries fulfill their duties. The court noted that although breaches of duty in sales processes are rare, financial advisers play a “central role” in such transactions (or exploring other alternatives), such that when a breach happens, a sell-side financial adviser is more likely to have assisted in causing such a breach. Here, the stockholders alleged that the company financial adviser tipped off the acquirer as to the pricing, conducted an intentionally narrow search process and excluded the special committee’s financial advisory team from real participation in the transaction. On that basis, the court held that the stockholders plausibly stated a claim for aiding and abetting liability. Notably, the aiding and abetting claims against the acquirer were dismissed under the Mindbody framework.
Furthermore, while it did not reach a decision on whether the company financial adviser’s failure to correct EngageSmart’s proxy statement amounted to aiding and abetting liability, the court suggested that it may be different than nondisclosures of the sort found in Mindbody and other decisions, but nevertheless left unsaid how the financial adviser would make corrections to the company’s document. This raises an important practical question: How can financial advisers become liable for failing to “correct” a document they do not author or control? In practice, such a standard may be difficult to enforce. Nevertheless, the court emphasized that sell-side financial advisers and third-party acquirers are differently situated and play distinct roles, and the outcome for disclosure-based aiding and abetting claims could be “inferably different.”
The EngageSmart decision accords with the Court of Chancery’s decision in Electric Last Mile Solutions, Inc. Shareholder Litigation, issued in January 2026, in which Chancellor Kathaleen McCormick similarly held (albeit also at the motion to dismiss stage with an undeveloped factual record) that the plaintiffs had stated an aiding and abetting claim against a sell-side financial adviser for allegedly possessing firsthand knowledge that misled stockholders and authorizing presentations that contained information it allegedly knew to be untrue. For example, the proxy statement and board presentations contained financial projections that conflicted with earlier projections that the financial adviser received. Taken together, EngageSmart and Electric Last Mile clarify that financial advisers must remain diligent in disclosing conflicts, regardless of which side of the transaction they are on.
Practical Tips
- A high bar is still in place for proxy disclosure, and conflicts of interest should be disclosed thoroughly. Stating that a financial adviser “may” have business relationships with transaction counterparties is insufficient when actual, concurrent engagements exist.
- Companies should also clearly disclose the relative roles of a financial adviser for the company and a financial adviser for a special committee. The disclosure should clarify which financial adviser played the leading role.
- Mindbody and other decisions do not provide as much protection for sell-side financial advisers, particularly when they have in fact played a central role in structuring a deal.
McGuireWoods continues to monitor developments in Delaware corporate law. For questions, contact the authors or a member of the Securities & Shareholder Litigation Practice Area.