In in re Cornerstone Theraputics Inc., 2015 Del. LEXIS
231 (Del. Ch. May 14, 2015), the Delaware Supreme Court held that
allegations that a director approved an interested transaction will
not be sufficient to survive that director's motion to dismiss
where the corporation has enacted an exculpatory charter provision
and the plaintiff failed to specifically allege a non-exculpated
claim against that director. Prior to the Delaware Supreme Court's
holding, disinterested, independent directors were often required
to remain parties to litigation until the end of trial even where
the certificate of incorporation contained an exculpatory provision
pursuant to 8 Del. C. § 102(b)(7) and the plaintiffs did not allege
any non-exculpated claims against those directors. This holding
provides an avenue for directors to dismiss the claims against
them, and avoid the unnecessary burden and expense of protracted
litigation when there are no specific allegations that they engaged
in wrongdoing.
The Cornerstone decision was a consolidated opinion
issued on two appeals that involved actions for damages by
stockholder plaintiffs arising out of mergers in which tthe
controlling stockholder, who had representatives on the board of
directors, acquired the remainder of the shares that it did not own
in a Delaware public corporation. Both mergers were negotiated by
special committees of independent directors, were ultimately
approved by a majority of the minority stockholders, and were at
substantial premiums to the pre-announcement market price. The
plaintiffs in both cases sued the controlling stockholder and their
affiliated directors as well as the independent directors who had
negotiated and approved the mergers. In both cases, independent
directors moved to dismiss the claims against them because the
plaintiffs failed to plead any claims that were not exculpated by
their company's charter provision adopted pursuant to 8 Del. C. §
102(b)(7).
In reaching its holding on the appeals, the court rejected the
plaintiffs' argument that they should be entitled to an automatic
inference that the directors who facilitated the interested
transaction were disloyal where the transaction involved a
controlling shareholder. The court held that "to require
independent directors to remain defendants solely because the
plaintiffs stated a non-exculpated claim against the controller and
its affiliates would be inconsistent with Delaware law and would
also increase costs for disinterested directors ... without
providing a corresponding benefit."
The court explained that "[a]lthough it is wise for our law to
focus on whether the independent directors can say no, it does not
follow that it is prudent to create an invariable rule that any
independent director who says yes to an interested transaction
subject to entire fairness review must remain as a defendant until
the end of the litigation, regardless of the absence of any
evidence suggesting that the director acted for an improper
motive." Thus, the decision preserves room for the important role
of independent directors in serving as members of special
committees and negotiating transactions with controlling
shareholders by enabling independent directors to escape from
litigation where there are no claims that they breached their duty
of loyalty.
Takeaways
For plaintiffs, the Cornerstone decision provides the
following guidance: "[w]hen a director is protected by an
exculpatory charter provision, a plaintiff can survive a motion to
dismiss by that director defendant by pleading facts supporting a
rational inference that the director harbored self-interest adverse
to the stockholders' interests, acted to advance the self-interest
of an interest party from whom they could not be presumed to act
independently, or acted in bad faith." Id. at *14. In
short, if a plaintiff fails to plead specific allegations
implicating a director's duty of loyalty or good faith, then that
director will have grounds to be dismissed from the case.
For independent directors, it highlights the protection offered
by exculpatory charter provisions adopted pursuant to 8 Del. C. §
102(b)(7).
The bottom line is that the Cornerstone decision
provides guidance that will be instructive to both litigants and
companies when contemplating the best strategy for initiating or
defending against breach of fiduciary duty claims and for
organizing Delaware corporations to begin with.
This article appeared in the December 2015 edition
of the ComCom Quarterly, the newsletter of the Complex Commercial
Litigation Section. For more articles like these on business
litigation, bankruptcy, and intellectual property topics, check out
the Quarterly at http://is.gd/lFJCJw.