McPadden v. Sidhu - 964 A.2d 1262 (Del. Ch. 2008)

Rule:

Though an officer owes to a corporation identical fiduciary duties of care and loyalty as owed by directors, an officer does not benefit from the protections of a Del. Code Ann. tit. 8, § 102(b)(7) exculpatory provision, which are only available to directors.

Facts:

Defendant i2 Technologies, Inc. had a charter that included a Del. Code Ann. tit. 8, § 102(b)(7) exculpatory provision protecting directors from liability. The company decided to sell its wholly owned subsidiary, Trade Services Corporation ("TSC"). The shareholder alleged that when the buyer, a TSC’s then vice president, defendant Anthony Dubreville, learned of the possible sale, Dubreville manipulated the subsidiary's earnings to discourage other purchasers. Dubreville also allegedly knew of a purchaser willing to pay a large sum for the subsidiary. The directors then got Dubreville to broker the sale. He engineered a sale to a management team he led. Two years later, Dubreville sold the subsidiary for more than eight times the purchase price. The shareholder sued the directors who permitted the initial sale and the buyer for breach of fiduciary duty, and the buyer for unjust enrichment. The directors and buyer moved to dismiss the claims.

Issue:

1. Should the court grant the directors’ motion to dismiss?
2. Should the court grant the buyer’s motion to dismiss?

Answer:

1) Yes. 2) No.

Conclusion:

The Court held that although plaintiff has demonstrated that it would have been futile to make a demand upon the board, plaintiff failed to state a claim against the defendant directors, who had the benefit of a section 102(b)(7) exculpatory provision in the i2 certificate, because plaintiff has not adequately alleged that the Director Defendants acted in bad faith. In contrast, however, plaintiff has stated a claim for both breach of fiduciary duty and unjust enrichment as to Dubreville. Dubreville, though he, as an officer, owed the same duties to the Company as the Director Defendants, did not benefit from the same protections as the Director Defendants because the section 102(b)(7) provision operates to exculpate only directors, not officers. Moreover, the Court found that the allegations of Dubreville’s conduct sufficiently stated an unjust enrichment claim. Accordingly, the trial granted the directors' motion to dismiss the shareholder's breach of fiduciary duty claim. However, the trial court denied the buyer's motion to dismiss the shareholder's breach of fiduciary duty claim against the buyer, and denied the buyer's motion to dismiss the shareholder's unjust enrichment claim.