McPadden v. Sidhu

Rule of Law:

Under Delaware law, a board's grossly negligent conduct, constituting a breach of the duty of care, does not, without more, rise to the level of bad faith conduct, which constitutes a breach of the duty of loyalty. Directors protected by a Section 102(b)(7) exculpatory provision in the corporate charter are therefore shielded from personal monetary liability for acts of gross negligence.

Facts:

• i2 Technologies, Inc. ('i2') decided to sell its wholly owned subsidiary, Trade Services Corporation ('TSC').
• A competitor, VIS/ME, had previously informed i2 directors and TSC vice president Anthony Dubreville of its interest in acquiring TSC for up to $25 million.
• The i2 board of directors tasked Dubreville with managing the sale process for TSC, despite knowing that he was interested in leading a management buyout of the subsidiary himself.
• Dubreville conducted a limited marketing process for TSC, providing manipulated financial projections and failing to solicit bids from any of TSC's direct competitors, including VIS/ME.
• Dubreville’s management group, TSH, offered to purchase TSC for $3 million, an offer the i2 board approved based on a flawed process and a fairness opinion derived from buyer-provided projections.
• Approximately two years after the sale, after rejecting an $18.5 million offer as too low, TSH sold TSC to another company for over $25 million.

Procedural Posture:

• A shareholder plaintiff initiated a derivative action on behalf of i2 Technologies, Inc. in the Delaware Court of Chancery.
• The complaint alleged breach of fiduciary duty against the Director Defendants and officer Anthony Dubreville, and unjust enrichment against Dubreville.
• The plaintiff did not make a pre-suit demand on the board, asserting that demand was excused for futility.
• All defendants moved to dismiss the complaint under Chancery Rule 12(b)(6) for failure to state a claim and Chancery Rule 23.1 for failure to plead facts excusing demand.