Malpiede v. Townson
2001 WL 995264, 2001 Del. LEXIS 371, 780 A.2d 1075 (2001)
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Rule of Law:
A corporation's exculpatory charter provision, adopted pursuant to 8 Del. C. § 102(b)(7), bars claims for monetary damages against directors that are based solely on an alleged breach of the duty of care. Such a provision serves as a proper basis for dismissing a due care claim at the pleading stage if the complaint fails to state a non-exculpated claim, such as a breach of the duty of loyalty or good faith.
Facts:
- In June 1996, the board of Frederick's of Hollywood (“Frederick’s”) began searching for a suitable buyer for the company.
- On June 18, 1997, the Frederick’s board approved a merger agreement with Knightsbridge Capital Corporation (“Knightsbridge”) for $6.14 per share, which included a no-solicitation provision but allowed for negotiations if required by fiduciary duties.
- On August 21, 1997, Frederick’s received an unsolicited cash offer of $7.00 per share from Milton Partners.
- Four days later, Knightsbridge entered an agreement with the Mellinger Trusts to purchase their controlling block of Frederick's shares for $6.90 per share.
- On August 27, 1997, Frederick’s received another unsolicited, fully financed cash offer of $7.75 per share from Veritas Capital Fund (“Veritas”).
- On September 4, 1997, Knightsbridge exercised its rights and purchased the Trusts’ shares, acquiring a 41% voting block in Frederick's.
- On September 6, 1997, Knightsbridge increased its bid to match the $7.75 Veritas offer, but conditioned it on highly restrictive terms, including a strict “no-talk” provision, which the Frederick’s board approved.
- On September 11, 1997, Veritas increased its cash offer to $9.00 per share, but the Frederick's board rejected the bid, citing the restrictive merger agreement and Knightsbridge's controlling voting block.
Procedural Posture:
- Plaintiff shareholders filed a class action complaint in the Delaware Court of Chancery against the directors of Frederick's of Hollywood and against Knightsbridge Capital Corporation.
- The Court of Chancery denied the plaintiffs' motion for a temporary restraining order to enjoin the merger.
- Plaintiffs filed a Consolidated Amended Class Action Complaint seeking monetary damages.
- The defendant directors and Knightsbridge each filed motions to dismiss the amended complaint for failure to state a claim upon which relief can be granted pursuant to Chancery Rule 12(b)(6).
- The Court of Chancery granted the defendants' motions, dismissing all claims against both the directors and Knightsbridge.
- Plaintiffs, as appellants, appealed the Court of Chancery's dismissal to the Delaware Supreme Court.
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Issue:
Does a corporation's exculpatory charter provision, adopted pursuant to 8 Del. C. § 102(b)(7), bar a claim for monetary damages against directors based solely on an alleged breach of the duty of care, thereby permitting dismissal of such a claim on a Rule 12(b)(6) motion?
Opinions:
Majority - Veasey, Chief Justice
Yes. A corporate charter provision adopted pursuant to 8 Del. C. § 102(b)(7) immunizes directors from personal liability for monetary damages for breaches of the duty of care, and it can be invoked to dismiss such claims at the pleading stage. The court reasoned that the plaintiff's complaint failed to plead sufficient facts to support a non-exculpated claim for a breach of the duty of loyalty or good faith. After analyzing and dismissing the loyalty and disclosure claims as insufficient, the only remaining viable claim was for a breach of the duty of care (gross negligence). Because Frederick's charter contained a Section 102(b)(7) exculpatory provision, which is an affirmative defense, the directors were shielded from monetary damages for such a breach. Therefore, dismissing the due care claim at the pleading stage was appropriate, as the provision effectively negated the claim as a matter of law.
Analysis:
This decision solidifies the procedural power of a Section 102(b)(7) exculpatory charter provision as a tool for early dismissal of litigation against corporate directors. It clarifies that plaintiffs cannot survive a motion to dismiss by merely labeling a duty of care claim as a duty of loyalty claim; they must plead specific facts supporting a non-exculpated breach. The ruling provides directors significant protection from the costs and burdens of discovery in cases where their conduct, at worst, amounts to gross negligence. This precedent reinforces the legislative intent of Section 102(b)(7) to encourage qualified individuals to serve as directors without the constant fear of personal liability for business judgments made in good faith.
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