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Gagliardi v. Trifoods Int'l. - 683 A.2d 1049 (Del. Ch. 1996)

Rule:

A bad faith transaction is one that is authorized for some purpose other than a genuine attempt to advance corporate welfare or is known to constitute a violation of applicable positive law. There can be no personal liability of a director for losses arising from illegal transactions if a director is financially disinterested, acted in good faith, and relied on advice of counsel reasonably selected in authorizing a transaction.

Facts:

Plaintiff, Eugene Gagliardi, is the founder of the TriFoods, Inc. and in 1990 he induced certain persons to invest in the company by buying its stock. In 1993 he was removed as Chairman of the board and his employment with the company terminated. He continues to own approximately 13% of the company's common stock. The business of the company has, according to the allegations of the complaint, deteriorated very badly since Mr. Gagliardi's ouster. Gagliardi filed this shareholder suit claiming that defendants are liable to the corporation and to plaintiff individually on a host of theories, most importantly for mismanagement.

Issue:

Was the case dismissible on the grounds that the complaint failed to comply with Rule 23.1 (Class Actions) and for failure to state a claim upon which relief could be granted?

Answer:

Yes

Conclusion:

The chancery court granted the corporation's motion to dismiss regarding five of the six counts of the stockholder's suit. The court permitted the stockholder to amend the one remaining count of his complaint within 30 days. The court held that the stockholder had shown: (1) no fraudulent manipulation of the corporate process that fixed executive compensation; (2) some indication that interference with an at-will contract may have occurred; (3) a potential cause of action by those who suffered losses by advancing funds to the corporation on the basis of knowingly false projections, but not the stockholder; (4) no effort to intentionally frustrate his attempt to sell his stock but this claim could be particularized within 30 days; (5) no claim regarding negligent mismanagement; (6) no conflict of interest or improper motivation; (7) insufficient pleadings to justify a derivative suit for diversion of corporate opportunity or for refusal to sell assets; and (8) no compliance with Rule 23.1 regarding special pleading requirements for derivative suits.

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