Lacey v. Mota-Velasco, C.A. No. 2019-0312-SG (Del. Ch. Feb. 11, 2021) (Glasscock, V.C.)
In this memorandum opinion resolving motions to dismiss, the Delaware Court of Chancery addressed the plaintiff’s derivative claims against the defendant directors for their alleged misconduct in connection with several transactions. In connection therewith, the Court of Chancery dismissed a derivative claim alleging that the directors of a Delaware corporation breached a contractual duty to comply with a provision in the corporation’s certificate of incorporation requiring certain conflicted transactions to be approved by an independent committee of the board of directors. The Court concluded that the legal requirement for directors to comply with a corporation’s certificate of incorporation arises in connection with the exercise of their fiduciary duties and not in contract.
The plaintiff, Carla Lacey (“Plaintiff”), is a stockholder of the nominal defendant corporation Southern Copper Corporation (“Southern Copper”). Plaintiff brought suit on behalf of Southern Copper against the directors of Southern Copper (the “Director Defendants”) and against Americas Mining Corporation (“AMC”), alleging that a series of transactions between Southern Copper and entities related to its controllers were not the product of arms-length negotiating or bargaining, were not fair to Southern Copper, and failed to comply with a provision in Southern Copper’s certificate of incorporation requiring independent committee approval for conflicted transactions.
Having previously denied the Director Defendants’ motion to dismiss Plaintiff’s claims for breach of fiduciary duties, the Court addressed the motions to dismiss Plaintiff’s derivative claims asserting that (i) Director Defendants breached a contractual duty to comply with the independent committee requirement in Southern Copper’s certificate of incorporation and (ii) AMC, the majority owner of Southern Copper stock, breached its fiduciary duties to Southern Copper.
The Court granted the motion to dismiss with respect to the derivative breach of contract claims against the Director Defendants. In rejecting Plaintiff’s theory that the Director Defendants can be liable to Southern Copper itself for breach of contract stemming from the failure to abide by the Southern Copper certificate of incorporation, the Court examined the contractual relationships created by a certificate of incorporation. The Court explained that certificates of incorporation are generally viewed as an agreement among stockholders, the corporation and the corporation’s directors, which conceptually supports direct suits by stockholders against the corporation based on a breach of the certificate of incorporation. Here, Plaintiff is bringing suit on behalf of Southern Copper for breach of contract against the Director Defendants for allowing Southern Copper to violate a provision of its certificate of incorporation. The Court held that the Director Defendants are not counterparties to Southern Copper with respect to the contractual nexus that is the certificate of incorporation, the bylaws and the DGCL. The Court concluded that Southern Copper did not have a claim against the Director Defendants for breach of contract, directly or indirectly, and that “directors are not subject to a contract simply because it binds the corporation.” The Court stressed that Plaintiff did not plead any facts that indicated the Director Defendants were contractually bound to Southern Copper in any way beyond the existence of the certificate of incorporation itself. Instead, the Court explained that “the relationship between directors and their corporation is typically fiduciary, rather than contractual,” and that any claim the corporation might have against the directors for failing to comply with the entity’s formative documents would be a claim for breach of fiduciary duty.
The Court also granted the motion to dismiss certain breach of fiduciary duty claims against AMC because, although AMC is a controlling stockholder of Southern Copper, Plaintiff failed to allege any specific facts that AMC manipulated the corporate machinery as a controller (aside from one of the transactions where the Court denied the motion to dismiss as AMC admitted they stood on both sides of such transaction). The Court stressed that Plaintiff’s complaint must allege more than simple chain of control to trigger the entire fairness standard, and that a complaint must show that the controller actually asserted control or influence over the entity for the more arduous standard to apply.