CLIENT ALERT: Delaware Supreme Court Establishes Rule Permitting Dismissal of Independent Directors From Entire Fairness Suits
In re Cornerstone Therapeutics Inc. S’holder Litig., No. 564, 2014 (Del. May 14, 2015) & Leal v. Meeks, No. 706, 2014 (Del. May 14, 2015)
In these interlocutory appeals, the Delaware Supreme Court resolved a long-standing split in Delaware authorities by ruling that independent directors (including members of a special committee negotiating a transaction with a controlling stockholder) who are protected by a Section 102(b)(7) exculpatory charter provision will be entitled to dismissal from a case challenging a controlling stockholder transaction unless the stockholder plaintiff asserts well-pled non-exculpated claims for breach of fiduciary duty against the independent directors.
Both cases involved a post-closing damages action by stockholder-plaintiffs arising from a going private merger effected by a controlling stockholder. Each merger was negotiated by a special committee of independent directors and was ultimately approved by the holders of a majority of the stock held by minority holders. Neither transaction, however, qualified for business judgment review under Kahn v. M&F Worldwide Corp., 88 A.3d 635 (Del. 2014) because the controller’s merger proposal was not conditioned from the outset on “majority of the minority” stockholder approval. Thus, the entire fairness standard presumptively applied to each challenged transaction.
In each case, the independent directors as well as the controlling stockholder and its affiliated directors were named as defendants. And in each case, the independent director defendants moved to dismiss on the ground that the claims against them asserted no more than a breach of the fiduciary duty of care, for which they could not be personally liable by operation of a Section 102(b)(7) exculpatory charter provision. The Court of Chancery in both cases, relying on Emerald Partners v. Berlin, 787 A.2d 85 (Del. 2001), denied the independent directors’ motions and held that where entire fairness applies, independent directors must remain in the case through trial, regardless of whether the plaintiffs had sufficiently pled any non-exculpated claims against them.
The Delaware Supreme Court reversed, holding that “even if a plaintiff has pled facts that, if true, would require the transaction to be subject to the entire fairness standard of review, and the interested parties to face a claim for breach of their duty of loyalty, the independent directors do not automatically have to remain defendants.” Rather, “[w]hen the independent directors are protected by an exculpatory charter provision and the plaintiffs are unable to plead a non-exculpated claim against them, those directors are entitled to have the claims against them dismissed[.]” A plaintiff can plead non-exculpated claims against an independent director 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 interested party from whom they could not be presumed to act independently, or acted in bad faith.” The Supreme Court remanded the cases to the Court of Chancery to determine whether the plaintiffs have sufficiently pled non-exculpated claims against the independent directors.
This opinion should provide some comfort to independent directors, and in particular special committee members, that they will not necessarily be subject to the burdens of defending themselves in court in post-closing litigation simply by reason of their service as independent decision makers in a conflict transaction. Independent directors, however, will remain important players in any such litigation. Moreover, because the protections of a Section 102(b)(7) provision do not extend to injunctive relief, this opinion will likely have little effect on pre-closing litigation.