Leal v. Meeks (In re Cornerstone Therapeutics, Inc.) - 115 A.3d 1173 (Del. 2015)

Rule:

Plaintiffs must plead a non-exculpated claim for breach of fiduciary duty against an independent director protected by an exculpatory charter provision, or that director will be entitled to be dismissed from the suit. That rule applies regardless of the underlying standard of review for the transaction. When a director is protected by an exculpatory charter provision, a plaintiff can survive a motion to dismiss by that director defendant 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. But the mere fact that a plaintiff is able to plead facts supporting the application of the entire fairness standard to the transaction, and can thus state a duty of loyalty claim against the interested fiduciaries, does not relieve the plaintiff of the responsibility to plead a non-exculpated claim against each director who moves for dismissal.

Facts:

A Delaware public corporation entered into mergers in which the controlling stockholder, who had representatives on the board of directors, acquired the remainder of the shares that it did not own in the corporation. Both mergers were negotiated by special committees of independent directors, were ultimately approved by a majority of the minority stockholders, and were at substantial premiums to the pre-announcement market price. In entering into the merger, the companies did not follow the process established in Kahn v. M&F Worldwide Corporation as a safe harbor to invoke the business judgment rule in the context of a self-interested transaction. Plaintiff shareholders filed a complaint against the controlling stockholders, their affiliated directors, and the independent directors who had negotiated and approved the mergers, contending that the defendants had breached their fiduciary duty by approving transactions that were unfair to the minority stockholders. The independent director defendants moved to dismiss on the grounds that the plaintiffs had failed to plead any non-exculpated claim against them. The independent directors argued that although the entire fairness standard applied to the Court of Chancery's review of the underlying transaction, and thus the controlling stockholder and its affiliated directors were at risk of being found liable for breaches of the duty of loyalty, the plaintiffs still bore the burden to plead non-exculpated claims against the independent directors. The Court of Chancery denied the independent director defendants’ motion to dismiss, holding that even if the plaintiffs could not plead a non-exculpated claim against any particular director, as long as the underlying transaction was subject to the entire fairness standard of review, and the plaintiffs were therefore able to state non-exculpated claims against the interested parties and their affiliates, all of the directors were required to remain defendants until the end of litigation. The independent director defendants challenged the decision.

Issue:

If a plaintiff challenged an interested transaction that was presumptively subject to entire fairness review, must he plead a non-exculpated claim against the disinterested, independent directors to survive a motion to dismiss by those directors?

Answer:

Yes.

Conclusion:

The Court held that although entire fairness review presumptively applied to claims by minority stockholders arising out of mergers in which the controlling stockholder acquired the remaining shares, the minority stockholders were required to plead non-exculpated claims against independent directors who were insulated from liability for monetary damages for breaches of the fiduciary duty of care by an exculpatory charter provision adopted in accordance with Del. Code Ann. tit. 8, § 102(b)(7) to survive a motion to dismiss, regardless of the underlying standard of review for the board's conduct. Accordingly, a remand was necessary for the Court of Chancery to determine whether the minority stockholders had sufficiently pled facts suggesting that the independent directors committed a non-exculpated breach of their fiduciary duty.