In Re Cornerstone Theraputics, Inc.
113 A.3d 1089 (Del. 2015) (2015)
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Rule of Law:
To survive a motion to dismiss, a plaintiff seeking monetary damages against a director protected by an exculpatory charter provision must plead non-exculpated claims for breach of fiduciary duty, even if the underlying transaction is presumptively subject to the entire fairness standard of review.
Facts:
- Chiesi Farmaceutici S.p.A., a privately-held drug maker, beneficially owned 65.4% of Cornerstone Therapeutics Inc., a public Delaware pharmaceutical company.
- Chiesi sought to acquire all the remaining stock of Cornerstone Therapeutics Inc. it did not already own through a going-private merger.
- A special committee of Cornerstone's independent directors negotiated the terms of this merger.
- The merger was ultimately approved by a majority of Cornerstone's minority stockholders and was at a 78% premium over the closing stock price on the date Chiesi delivered its offer letter.
- Cornerstone Therapeutics Inc.'s certificate of incorporation included an exculpatory provision, adopted under 8 Del. C. § 102(b)(7), which insulated its directors from monetary liability for breaches of the duty of care.
- Stockholder plaintiffs subsequently filed suit, contending that the directors breached their fiduciary duties by approving a transaction that was unfair to minority stockholders.
Procedural Posture:
- Stockholder plaintiffs filed suit in the Court of Chancery of the State of Delaware (trial court) in In re Cornerstone Therapeutics Inc. Stockholder Litigation, alleging that directors breached their fiduciary duties by approving an unfair merger.
- The independent director defendants moved to dismiss the claims against them, arguing that the plaintiffs had failed to plead any non-exculpated claims, given their protection by an exculpatory charter provision.
- The Court of Chancery denied the independent directors' motions to dismiss, interpreting precedent to require doing so because the underlying transaction was subject to the entire fairness standard of review, regardless of the exculpatory charter provision.
- The Court of Chancery in Cornerstone Therapeutics (and in the related consolidated case, In re Zhongpin Inc. S’holders Litig.) recognized the important and uncertain issue of corporate law at stake and recommended certification of an interlocutory appeal to the Supreme Court of the State of Delaware.
- The independent directors below-appellants appealed the Court of Chancery's denial of their motions to dismiss to the Supreme Court of the State of Delaware.
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Issue:
Does a plaintiff seeking monetary damages against independent directors, who are protected by an exculpatory charter provision, need to plead non-exculpated claims for breach of fiduciary duty to survive a motion to dismiss, even when the challenged interested transaction is presumptively subject to the entire fairness standard of review?
Opinions:
Majority - Chief Justice Strine
Yes, a plaintiff seeking monetary damages against independent directors protected by an exculpatory charter provision must plead non-exculpated claims for breach of fiduciary duty to survive a motion to dismiss, even when the challenged interested transaction is presumptively subject to entire fairness review. The Court clarified that the application of the entire fairness standard to an interested transaction does not automatically require independent directors to remain defendants if they are protected by a Section 102(b)(7) exculpatory charter provision. Citing Malpiede v. Townson, the Court reiterated that plaintiffs must plead non-exculpated claims (i.e., breach of loyalty or bad faith) against individual directors to survive dismissal. The stringency of entire fairness review against interested parties (who face a pleading-stage inference of disloyalty due to their conflicts of interest) does not extend to independent directors absent specific allegations of their disloyalty or bad faith. The Court rejected the plaintiffs' broad reading of the Emerald Partners decisions, clarifying that those cases involved situations where loyalty claims were sufficiently intertwined with care claims and record evidence supported an inference of disloyal conduct. Adopting the plaintiffs' approach would be inconsistent with Delaware law, which presumes independent directors are motivated to fulfill their duties and requires individualized consideration of director conduct. Such a rule would also undermine the legislative purpose of Section 102(b)(7) by discouraging independent directors from serving on special committees and taking necessary business risks, thereby potentially reducing benefits for minority stockholders. The Court remanded the cases for the Court of Chancery to determine if non-exculpated claims were sufficiently pled against the independent directors.
Analysis:
This decision significantly clarifies the pleading burden for plaintiffs challenging interested transactions in Delaware, particularly regarding independent directors. By requiring specific allegations of non-exculpated conduct (loyalty or bad faith breaches) against independent directors at the motion to dismiss stage, even under entire fairness review, the Delaware Supreme Court reinforces the protections afforded by Section 102(b)(7). This ruling aims to prevent meritless litigation against disinterested directors, encouraging them to actively participate in special committees without fear of prolonged litigation solely due to the transaction's inherent conflict. It underscores the individualized nature of director liability and the importance of specific pleading in corporate fiduciary duty cases.
