Malone v. Brincat
722 A.2d 5, 1998 Del. LEXIS 495, 1998 WL 919123 (1998)
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Rule of Law:
Directors have a fiduciary duty to shareholders to exercise due care, loyalty, and good faith in all communications, and they breach this duty by knowingly disseminating false information, regardless of whether they are seeking shareholder action.
Facts:
- John N. Brincat and other individuals were directors of Mercury Finance Company ('Mercury'), a publicly-traded Delaware corporation.
- From 1993 through 1996, the directors allegedly caused Mercury to knowingly and intentionally disseminate financial information that materially overstated the company's earnings and shareholder equity.
- For example, Mercury's 1996 earnings were reported as $120.7 million but were actually only $56.7 million.
- Similarly, shareholders' equity on December 31, 1996, was reported as $353 million but was in fact only $263 million or less.
- This inaccurate information was included in Mercury's SEC filings and other communications to shareholders.
- Doran Malone and other plaintiffs were owners of Mercury common stock during this period.
- The complaint alleged that as a direct result of these false disclosures, Mercury lost approximately $2 billion in value.
- The complaint also alleged that Mercury's auditor, KPMG Peat Marwick LLP, knowingly participated in the directors' breaches of fiduciary duty.
Procedural Posture:
- Doran Malone and other shareholders filed a class action lawsuit against the directors of Mercury Finance Company and its auditor, KPMG Peat Marwick LLP, in the Delaware Court of Chancery (trial court).
- The complaint alleged breach of fiduciary duty of disclosure by the directors and aiding and abetting the breach by KPMG.
- The defendants filed a motion to dismiss for failure to state a claim upon which relief could be granted.
- The Court of Chancery granted the motion and dismissed the complaint with prejudice, ruling that directors have no fiduciary duty of disclosure in the absence of a request for shareholder action.
- The plaintiffs (appellants) appealed the dismissal to the Supreme Court of Delaware, with the directors and KPMG as appellees.
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Issue:
Does a corporate director's fiduciary duty of disclosure apply to communications with shareholders even when no specific shareholder action is being requested?
Opinions:
Majority - Holland, Justice
Yes. Directors' fiduciary duties of care, loyalty, and good faith are constant and unremitting, applying to all communications with shareholders, not only those seeking shareholder action. The court reasoned that the fiduciary relationship between directors and shareholders demands honesty. While the specific equitable claim for 'breach of the duty of disclosure' is traditionally linked to requests for shareholder action (where elements like reliance and damages need not be proven), the broader duties of loyalty and good faith are violated when directors knowingly disseminate false information at any time. Such a breach can give rise to a derivative claim for harm to the corporation or a direct claim for harm to individual stockholders. Although the plaintiffs' complaint was dismissed for failing to properly plead a specific cause of action (derivative or direct) and an appropriate remedy, the dismissal should have been without prejudice to allow them to amend their complaint.
Analysis:
This case significantly clarifies and expands the scope of director fiduciary duties under Delaware law. It establishes that the duty of disclosure is not a narrow, transaction-specific obligation but a component of the overarching and continuous duties of loyalty and good faith. The decision provides a state-law cause of action for shareholders who are harmed by holding stock in reliance on false information, a situation often not covered by federal securities laws which typically require a purchase or sale of securities. This holding reinforces that directors' duty of honesty is a fundamental aspect of the director-shareholder relationship, irrespective of whether a vote or transaction is pending.
