Arnold v. Society for Sayings Bancorp, Inc.
678 A.2d 533, 1996 WL 369383, 1996 Del. LEXIS 245 (1996)
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Rule of Law:
A corporation is not directly or vicariously liable for monetary damages for its directors' good faith breach of the fiduciary duty of disclosure when those directors are personally protected from liability by a valid exculpatory charter provision enacted under 8 Del. C. § 102(b)(7). A breach of the common law duty of disclosure does not, by itself, render a merger that complies with all statutory requirements void.
Facts:
- Society for Savings Bancorp, Inc. ('Bancorp') entered into a merger agreement with a wholly-owned subsidiary of Bank of Boston.
- In connection with the planned merger, Bancorp's directors prepared and distributed a proxy statement to shareholders to solicit their approval.
- The proxy statement contained a partial, and therefore misleading, disclosure concerning a prior bid that had been made for one of Bancorp's subsidiaries.
- Relying on the information provided in the proxy statement, Bancorp's shareholders voted to approve the merger.
- The merger was subsequently completed, and the shares of Bancorp stockholders, including Robert Arnold, were converted into shares of the acquiring entity.
Procedural Posture:
- Robert Arnold filed an action in the Delaware Court of Chancery seeking to enjoin the merger of Bancorp into a subsidiary of Bank of Boston.
- The Court of Chancery, a trial court, denied the injunction, and the merger was completed.
- The Court of Chancery then entered summary judgment in favor of all defendants.
- Arnold, as appellant, appealed to the Delaware Supreme Court, the state's highest court.
- In the first appeal (Arnold I), the Supreme Court reversed in part, finding the director defendants had breached their duty of disclosure but were shielded from personal monetary liability by Bancorp's § 102(b)(7) charter provision because they acted in good faith.
- The Supreme Court remanded the case to the Court of Chancery to determine if any remedy was available against the corporate defendants.
- On remand, the Court of Chancery granted summary judgment in favor of the corporate defendants, Bancorp and Bank of Boston, on all claims except for aiding and abetting.
- Arnold again appealed the grant of summary judgment to the Delaware Supreme Court.
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Issue:
Does a corporation have direct or vicarious liability for monetary damages stemming from a good faith breach of the duty of disclosure by its directors, when those directors are protected from personal liability by a § 102(b)(7) exculpatory charter provision?
Opinions:
Majority - Veasey, Chief Justice
No. A corporation is not directly or vicariously liable for monetary damages for its directors' good faith disclosure breach when an exculpatory charter provision shields the directors. The court reasoned that a breach of the judicially-created fiduciary duty of disclosure does not invalidate a merger that complies with all explicit statutory requirements. Since the merger between Bancorp and Bank of Boston followed the statutory procedures in 8 Del. C. §§ 251 and 252, it was legally effective. Consequently, Arnold's claim for conversion fails because he no longer possessed a post-merger property right to his Bancorp shares. Furthermore, the court rejected holding the corporation vicariously liable under a theory of respondeat superior, stating it would be an 'analytical anomaly' to treat directors, who are fiduciaries managing the corporation, as agents controlled by the corporation. Such liability would be circular, shifting the cost of the breach from the protected directors to the corporation and, ultimately, to the shareholders who were the class harmed by the breach, thus undermining the purpose of § 102(b)(7). Finally, the court declined to create a new cause of action for direct corporate liability for disclosure failures, viewing that as a legislative function.
Analysis:
This decision significantly reinforces the protective power of § 102(b)(7) exculpatory charter provisions. It clarifies that such provisions not only shield directors from personal liability for good faith duty of care violations but also prevent plaintiffs from circumventing this protection by suing the corporation itself for monetary damages. The court draws a sharp distinction between failing to follow statutory merger formalities, which could void a merger, and breaching a common law fiduciary duty, which does not. This holding solidifies that when a valid § 102(b)(7) provision is in effect, the primary remedy for a good faith disclosure violation is prospective injunctive relief (e.g., stopping the merger or ordering corrective disclosure), not retrospective monetary damages against any party after the merger has closed.
