Disinterested Directors and 'Entire Fairness' Cases
In his Corporate Litigation column, Joseph M. McLaughlin writes: Last month, the Delaware Supreme Court ruled that regardless of the underlying standard of review for the board's conduct, a plaintiff must plead a non-exculpated claim against disinterested directors to avoid dismissal at the pleading stage. In so holding, the court reversed two decisions issued last year by the Court of Chancery and clarified the seminal 'Emerald Partners v. Berlin' decision, which those decisions interpreted.
June 10, 2015 at 04:50 PM
11 minute read
Under Delaware law, where a controlling shareholder stands on both sides of a corporate transaction that is challenged by minority stakeholders, the controller presumptively bears the burden of proving the entire fairness of the transaction, i.e. “both fair dealing and fair price.” Conversely, disinterested directors—those with no financial stake in the transaction—may be liable for breach of fiduciary duty only where they have breached a non-exculpated duty in connection with the negotiation or approval of the transaction.
Delaware General Corporation Law §102(b)(7) authorizes corporations to include a provision in the certificate of incorporation exculpating their directors from money damages claims based on breach of the duty of care, but not the duty of loyalty. Delaware courts have long held that a §102(b)(7) charter provision “entitles directors to dismissal of any claims for money damages against them that are based solely on alleged breaches of the board's duty of care.”1 The overwhelming majority of Delaware corporations have adopted exculpatory provisions.
In lawsuits in which the entire fairness standard of review applies, however, the availability of the exculpatory charter defense at the pleading stage has been less than clear. There has been agreement that a minority shareholder asserting claims against a controlling shareholder who transacted with the corporation must “plead facts raising an inference that the defendant stockholder is a controller and that the transaction was not entirely fair to the majority” to survive the controller's motion to dismiss.2 Until recently, however, Delaware courts have grappled with the pleading standard applicable to claims against disinterested directors alleged to have breached their fiduciary duties in connection with a controlling party transaction.
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