Turner v. Bernstein
776 A.2d 530, 2000 WL 776893, 2000 Del. Ch. LEXIS 96 (2000)
Rule of Law:
Directors of a corporation have a fiduciary duty to disclose all material facts within their control that a reasonable stockholder would consider important when making a decision regarding a proposed transaction, such as whether to accept merger consideration or demand appraisal, and this duty cannot be shifted to stockholders to proactively seek information.
Facts:
- GenDerm, a non-public pharmaceutical company founded by Dr. Joel E. Bernstein, experienced financial difficulties in late 1995 and 1996, leading its board to seek a buyer.
- After various efforts, GenDerm entered a letter of intent in October 1997 to be acquired by Medicis Pharmaceutical Corporation, with Dr. Bernstein having previously provided Medicis with a detailed 'Seller's Report' showing GenDerm's improved financial health and positive future prospects.
- Around December 1, 1997, the GenDerm board sought written stockholder consents for the Medicis merger, distributing only 'extremely cursory information' that lacked current financial data, projections, or an explanation of why the merger was in the stockholders' best interest.
- The Medicis merger closed on December 3, 1997, after which GenDerm sent communications informing stockholders of appraisal rights and share exchange procedures, but these also omitted material information.
- Despite plaintiff Richard Bernstein's earlier requests and threats of litigation in mid-1997, he only received 1995 and 1996 financial statements, and neither he nor plaintiff Stuart Turner had access to the detailed current financial information provided to Medicis.
- Plaintiffs, through signed letters of transmittal, accepted the merger consideration, and these letters explicitly waived their right to a statutory appraisal under 8 Del. C. § 262.
Procedural Posture:
- Stuart Turner and Richard A. Bernstein (plaintiffs) sued the former directors of GenDerm Corporation in the Delaware Court of Chancery.
- The complaint alleged that the directors breached their fiduciary duties by failing to provide material information to stockholders in connection with the December 1997 merger with Medicis Pharmaceutical Corporation.
- The plaintiffs filed an earlier motion for summary judgment on their disclosure claims, which Vice Chancellor Jacobs denied, ruling that further discovery was necessary to ascertain the extent of the plaintiffs' knowledge.
- The current matter is before the Delaware Court of Chancery on the plaintiffs' motion for partial summary judgment regarding the liability aspect of their disclosure claims.
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Issue:
Does the acceptance of merger consideration by stockholders, after receiving deficient disclosures from the corporation and having reason to suspect the transaction's fairness, constitute a waiver of their right to pursue an equitable claim for breach of fiduciary duty where the corporation's charter lacks an exculpatory provision?
Opinions:
Majority - Strine, Vice Chancellor
No, the acceptance of merger consideration by stockholders, even with some suspicion, does not constitute a waiver of their right to pursue an equitable claim for breach of fiduciary duty when the directors have defaulted on their affirmative obligation to provide all material information, and the company's charter lacks an exculpatory provision. The court found that the GenDerm directors indisputably failed to discharge their fiduciary duty of disclosure by providing stockholders with "extremely cursory information" regarding the Medicis merger, despite possessing a detailed "Seller's Report" indicating improved performance and future growth. This failure constituted a due care violation, especially given the absence of an exculpatory provision in GenDerm’s certificate of incorporation. The court rejected the directors' waiver defense because: (1) stockholders are entitled to receive material information from the directors and are not required to proactively seek it out or make decisions based on mere suspicion; (2) there was no record evidence that the plaintiffs had access to adequate information for an informed judgment, with old financials, Medicis press releases, and their counsel's limited knowledge being insufficient; and (3) the waiver in the letter of transmittal explicitly extended only to statutory appraisal actions under 8 Del. C. § 262, not to equitable actions for breach of fiduciary duty. Delaware law does not readily infer a broader waiver, and the court found no statutory basis to conclude that the appraisal remedy is exclusive, thus preserving avenues for stockholders to hold directors accountable for fiduciary breaches, particularly for grossly inadequate disclosures.
Analysis:
This case significantly reinforces the robust nature of directors' fiduciary duty of disclosure in Delaware, particularly in non-public company mergers. It clarifies that directors bear an affirmative, non-delegable duty to provide all material information, rejecting arguments that stockholders must actively seek out withheld facts or that external sources of information can cure directorial disclosure failures. Furthermore, the ruling emphasizes that waiving statutory appraisal rights does not automatically preclude equitable claims for fiduciary duty breaches, especially when disclosures are inadequate and no exculpatory provision protects the directors, thus providing a crucial avenue for recourse for shareholders.
