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Agar v. Judy, C.A. No. 9541-VCL (Del. Ch. Jan. 19, 2017) (Laster, V.C.)

January 19, 2017

In this opinion, the Court of Chancery held that three former directors of a Delaware corporation, each of whom lost their board seat in a contested election, adequately plead a defamation claim against a group of opposition stockholders for certain statements made during the course of the proxy contest.  While the court held that Delaware’s anti-SLAPP statute did not apply to the former directors’ claims, the Court determined that the former directors were “limited-purpose public figures” and thus were required to show that the allegedly defamatory statements were both false and made with actual malice.

On June 22, 2015, Preferred Communications Systems, Inc. (“PSCI”) held its annual stockholders meeting.  Five members of the Preferred Investors Association (the “Association”), which opposed the reelection of the incumbent directors, signed a letter that the Association distributed to PSCI’s investors in advance of the meeting (the “Fight Letter”).  The Fight Letter contained three subsets of allegedly defamatory statements regarding directors who were nominated by an organization opposing the Association, Preferred Spectrum Investments, LLC (the “PSI Directors”).  The first subset contained allegations that the PSI Directors were acting to benefit themselves by looting PSCI for their own personal gain (the “Looting Allegations”).  The second subset concerned allegations that the PSI directors were trying to conceal their actions from PSCI’s investors, including that they were ordered by the Court of Chancery to hold a stockholders meeting and provide books and records (the “Concealment Allegations”).  Finally, the third subset included statements that accused the PSI Directors of failing to make various payments to PSCI’s investors (the “Payment Allegations”).  Three of the incumbent directors subsequently lost their seats in the election and brought a claim for defamation against the Association and the members who signed the Fight Letter.

The defendants moved to dismiss the defamation claim for failure to state a claim upon which relief could be granted, arguing that the claim constituted a Strategic Lawsuit Against Public Participation (a “SLAPP”), such that heightened pleading standards applied under Delaware’s anti-SLAPP statute, and that the plaintiffs were limited-purpose public figures who thus had the burden of proving that the statements in the Fight Letter were not true and were made with actual malice.

The Court of Chancery reviewed the plain text of the anti-SLAPP statute and its legislative history and found that, based on the statutory cannons of ejusdem generis and noscitur a sociis and the statute’s legislative history, the statute was intended to apply in the land use context, but not generally to any lawsuit brought with an intent to inhibit free speech, including the plaintiffs’ defamation case.

The Court next considered whether the plaintiffs were limited purpose public figures, which would require them to establish two additional elements to prevail on their defamation claim: (1) that the statements were false and (2) that they were made with actual malice.  The Court considered the reasons for extending the actual malice standard to public figures, including the fact that public figures had greater access to channels of communication that allowed them to counter defamatory statements, and that they had voluntarily exposed themselves to increased risk of injury from defamatory statements.  Ultimately, the Court found that the plaintiffs qualified as public figures for the limited purpose of electoral-related communications because the PSI Directors (i) chose to stand for election, (ii) voluntarily assumed roles in which they would be exposed to greater scrutiny, and (iii) had access to corporate information and funds they could use to respond to misconduct allegations.

The Court therefore examined each subset of allegedly defamatory statements to determine if the plaintiffs met the requisite pleading standard.  With respect to the Looting Allegations, the Court held that, rather than alleging that the plaintiffs had violated criminal or civil law, those allegations referred to the authors’ personal opinions about the plaintiffs’ management of PSCI. As to the Concealment Allegations, the Court noted that the plaintiffs were “forced” to comply with the courts orders because they were legally obligated to follow them, notwithstanding the fact that the plaintiffs’ stipulated to such orders, and found that the defendants’ characterization of the plaintiffs’ actions was supported by the plaintiffs’ reluctance to comply with the Court’s orders.  The Court therefore dismissed the plaintiffs’ claims as to the Looting Allegations and the Concealment Allegations, along with the civil conspiracy and aiding and abetting claims relating to those allegations.  The Court found, however, that the plaintiffs had stated a claim regarding the Payment Allegations—as well as the civil conspiracy and aiding and abetting claims relating to those allegations—because a reader could interpret such allegations as factual assertions, and it was reasonably conceivable that such statements were false and made with actual malice.

The Court further ruled that the plaintiffs were allowed to sue the Association under a common name, making all of its members potentially responsible if damages were awarded.

The full opinion is available here