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:
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’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, firstname.lastname@example.org)
Jeffrey A. Chapman – Co-Chair, Dallas (214-698-3120, email@example.com)
Stephen I. Glover – Co-Chair, Washington, D.C. (202-955-8593, firstname.lastname@example.org)
Dennis J. Friedman – New York (212-351-3900, email@example.com)
Jonathan K. Layne – Los Angeles (310-552-8641, firstname.lastname@example.org)
Eduardo Gallardo – New York (212-351-3847, email@example.com)
Mergers and Acquisitions Group / Litigation:
Meryl L. Young – Orange County (949-451-4229, firstname.lastname@example.org)
Brian M. Lutz – San Francisco/New York (415-393-8379/212-351-3881, email@example.com)
Aric H. Wu – New York (212-351-3820, firstname.lastname@example.org)
Paul J. Collins – Palo Alto (650-849-5309, email@example.com)
Michael M. Farhang – Los Angeles (213-229-7005, firstname.lastname@example.org)
Adam H. Offenhartz – New York (212-351-3808, email@example.com)
Jonathan D. Fortney – New York (212-351-2386, firstname.lastname@example.org)
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