Brown v. Brewer - No. CV 06-3731-GHK (SHx), 2010 U.S. Dist. LEXIS 60863 (C.D. Cal. June 17, 2010)

Rule:

Delaware law governs Plaintiff's state law claim of breach of fiduciary duty. Under Delaware law, all directors and officers of a corporation owe their shareholders fiduciary duties of loyalty and care.

Facts:

In 2005, News Corporation acquired Intermix Media, Inc. (Intermix), formerly known as eUniverse, Inc., a company which owned, among other internet businesses, the social networking website MySpace. Plaintiff Jim Brown ("Plaintiff"), individually and on behalf of all members of the certified class of former Intermix shareholders, instituted the present shareholder class action, claiming that defendants Brett Brewer ("Brewer"), Daniel Mosher ("Mosher"), Lawrence Moreau ("Moreau"), David Carlick ("Carlick"), Andrew Sheehan ("Sheehan"), Richard Rosenblatt ("Rosenblatt"), James Quandt ("Quandt"), and William Woodward ("Woodward") (collectively, "Defendants"), the eight Intermix directors at the time of the company's sale, breached their fiduciary duties under state law and violated Section 14(a) of the Securities and Exchange Act of 1934 and SEC Rule 14a-9. The parties filed cross-motions for summary judgment. According to the defendants, the breach of fiduciary duty claim is barred, in whole or in part, by the exculpatory provision contained in Intermix’s Certificate of Incorporation.

Issue:

1. Could the director defendants be held liable for breach of duty of care, notwithstanding the exculpatory provision contained in Intermix’s Certificate of Incorporation?
2. Did the director defendants fulfill their duty of loyalty with respect to the merger in question, thereby warranting the grant of summary judgment in their favor?

Answer:

1) No. 2) No.

Conclusion:

The Court noted that under Delaware law, all directors and officers of a corporation owed their shareholders fiduciary duties of loyalty and care. However, the Delaware General Corporation Law permitted a corporation to include a provision in its charter eliminating or limiting the personal liability of a director to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director. While such an exculpatory provision may eliminate any liability for breaches of the duty of care, it shall not eliminate or limit the liability of a director: (i) For any breach of the director's duty of loyalty to the corporation or its stockholders; (ii) for acts or omissions not in good faith or which involved intentional misconduct or a knowing violation of law, or (iii) for any transaction from which the director derived an improper personal benefit. In the case at bar, Intermix's charter exculpated Defendants from any duty of care claims. In light of this provision, the Court concluded that the director Defendants cannot be liable for any purported breach of fiduciary duty based solely on their duty of care. With respect to Brewer and Rosenblat, who doubled as officers for Intermix, the Court held that where it was impossible to separate actions taken in fulfillment of a defendant’s duties as a corporate officer, then any duty of care claim stated against that individual would be exculpated. Since plaintiffs have not identified any actions taken by Rosenblat or Brewer solely in their capacity as officers, the Court held that the two aforementioned officers could also not be held liable based on the strength of the exculpatory provision.

Anent the liability for breach of the duty of loyalty, the Court held that the plaintiff must establish that "a majority of the Director Defendants either [1] stood on both sides of the merger or were dominated and controlled by someone who did; or [2] failed to act in good faith, i.e., where a fiduciary intentionally failed to act in the face of a known duty to act, demonstrating a conscious disregard for his duties." In the present case, the Court noted that there were genuine, triable issues of fact as to whether the directors acted in good faith with regard to the merger. Accordingly, defendants’ summary judgment on plaintiffs’ fiduciary claim was denied.