M&A Report – Delaware Supreme Court Issues Ruling Clarifying Important Protections Afforded to Independent Directors

May 19, 2015

On May 14, 2015, the Delaware Supreme Court reversed two rulings by the Court of Chancery and held that a "plaintiff seeking only monetary damages must plead non-exculpated claims against a director who is protected by an exculpatory charter provision to survive a motion to dismiss, regardless of the underlying standard of review for the board’s conduct–be it Revlon, Unocal, the entire fairness standard, or the business judgment rule."  In re Cornerstone Therapeutics Inc. Stockholder Litigation, Nos. 564, 2014 & 706, 2014 (Del. May 14, 2015).

Section 102(b)(7) of the Delaware General Corporation Law authorizes stockholders of a Delaware corporation to adopt a charter provision exculpating directors from paying monetary damages that are attributable solely to a violation of the duty of care (as opposed to violations of the duty of loyalty and/or acts of bad faith).  But, based on the Delaware Supreme Court’s decision in Emerald Partners v. Berlin, 787 A.2d 85 (Del. 2001), some Court of Chancery decisions have declined to apply the exculpation clause with respect to independent directors at the pleadings stage in transactions involving interested directors, including controlling stockholders where the standard of review for such transactions is that of entire fairness. 

In Cornerstone, an opinion authored by Chief Justice Strine, the Supreme Court reversed two recent Court of Chancery rulings that had declined to apply the exculpatory provision at the pleadings phase, holding that "[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." 

The Court’s holding has important implications for directors of Delaware corporations.  The Court’s decision emphasized that:

  • Independent directors are entitled to the presumption that they are motivated to do their duty with fidelity and thus are not assumed to be disloyal.  Op. at 12-13.
  • Independent directors are entitled to the full protections of an exculpatory clause adopted by a corporation pursuant to Section 102(b)(7).  Op. at 15-16.
  • Exculpated independent directors approving a transaction involving a controlling stockholder have a potent weapon in defending against shareholder lawsuits, and they will only remain in such suits where a plaintiff can plead "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."  Op. at 8.

This decision reinforces Delaware’s protection of exculpated independent directors when they support "potentially value-maximizing business decisions."  Op. at 15.

The opinion is available here.   

Gibson, Dunn & Crutcher LLP     

Gibson, Dunn & Crutcher’s lawyers are available to assist with any questions you may have regarding these issues.  For further information, please contact the Gibson Dunn lawyer with whom you usually work, or any of the following leaders and members of the firm’s Mergers and Acquisitions practice group:

Mergers and Acquisitions Group / Corporate Transactions:
Barbara L. Becker – Co-Chair, New York (212-351-4062, [email protected])
Jeffrey A. Chapman – Co-Chair, Dallas (214-698-3120, [email protected])
Stephen I. Glover – Co-Chair, Washington, D.C. (202-955-8593, [email protected])
Dennis J. Friedman – New York (212-351-3900, [email protected])
Jonathan K. Layne – Los Angeles (310-552-8641, [email protected])
Eduardo Gallardo – New York (212-351-3847, [email protected])

Mergers and Acquisitions Group / Litigation:
Meryl L. YoungOrange County (949-451-4229, [email protected])
Brian M. Lutz – San Francisco/New York (415-393-8379/212-351-3881, [email protected])
Aric H. Wu – New York (212-351-3820, [email protected])
Paul J. Collins – Palo Alto (650-849-5309, [email protected])
Michael M. Farhang – Los Angeles (213-229-7005, [email protected])
Adam H. Offenhartz – New York (212-351-3808, [email protected])
Jonathan D. Fortney – New York (212-351-2386, [email protected])

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