Directors of Delaware corporations cannot be held liable for breaches of the duty of care so long as their corporations’ charters include “exculpation” provisions. Those provisions, now virtually universal, protect directors from monetary damages for actions that do not involve bad faith or breaches of the duty of loyalty. In addition, corporate directors are fully protected when they rely in good faith on information, opinions, reports or statements presented by officers, employees or outside professionals, including attorneys or experts selected with reasonable care. However, neither of those protections applies under Delaware law to corporate officers, or to directors who are also officers when they are acting in their capacity as officers.
In Cirillo Family Trust v. Moezinia, C.A. No. 10116-CB (July 11, 2018), DAVA Pharmaceuticals, Inc., a private company with only 31 stockholders, was acquired by an affiliate of Endo Pharmaceuticals, Inc. All but one of DAVA’s stockholders approved the acquisition by written consent. The holdout stockholder, Cirillo, who held 0.27% of the company’s stock, brought suit against the corporation and its three directors, alleging, among other things, that the required notice to stockholders was defective under Delaware law because it omitted information that would have been material to a stockholder in deciding whether to accept the merger price or to seek appraisal of the stock in court. The notice “failed to include, among other things, any financial information relating to DAVA, any description of DAVA’s business and its future prospects, and any information about how the Merger price was determined or whether the price was fair to stockholders.”
Chancellor Andre G. Bouchard granted summary judgment in favor of the defendants on all counts. With respect to the notice, the Court found that there was no self-dealing or bad faith on the part of the director defendants, and therefore no breach of the duty of loyalty. And any breach of the directors’ duty of care was exculpated under the corporation’s certificate of incorporation and Section 102(b)(7) of the Delaware General Corporation Law. That section of the DGCL allows Delaware corporations to include provisions in their charters eliminating the liability of directors for monetary damages for breaches of their duty of care. In addition, the Court found that the director defendants were protected by Section 141(e) of the DGCL, which protects directors who rely on corporate officers, employees, attorneys, or advisors.
However, neither Section 102(b)(7) nor Section 141(e) applies to corporate officers – they apply only to directors. Thus, the plaintiff in Cirillo sought leave to amend his complaint to assert claims for breach of the duty of care against the two directors who also served as officers of DAVAS for “sending or allowing the Notice to be sent” to the plaintiff in defective form. The plaintiff pointed out that while “officers owe the same fiduciary duties to the corporation and its stockholders as directors,” they are not protected in the same way by the DGCL. Notwithstanding their status as directors, the two defendants were not protected from claims for breach of the duty of care “while acting in their capacity as officers.” Referring to Section 102(b)(7), the Court noted: “Although legislatively possible, there is currently no statutory provision authorizing comparable exculpation of corporate officers.”
The Court concluded that the plaintiff “has identified a theoretical path to recovery through a due care claim against [the two defendants] as officers where Sections 102(b)(7) and 141(e) would not apply.” The Chancellor allowed the claim to stand even though he was “highly skeptical” that the plaintiff could ultimately prevail. He stated two reasons for his ruling. First, the original claim, that the director defendants acted in bad faith in failing to include material information in the notice, had previously survived a motion to dismiss. The standard for surviving a motion to dismiss, that of stating a claim on which relief can be granted, is the same for a motion to amend a complaint. To state a claim against officers based on the same facts, the plaintiff would only have to allege that they acted with gross negligence, a lower bar than alleging bad faith for director liability. Second, the Court stated that the issue, whether the two defendants had satisfied their due care obligations with respect to the notice, had not been briefed for the Court’s consideration.
As the Court in Cirillo noted, the Delaware General Corporation Law does not protect corporate officers in the same way it protects corporate directors. In Cirillo, the defendants “relied entirely” on the corporation’s outside counsel (who was licensed only in New York) to meet the requirements of Delaware law for the form and content of the stockholder notice. Cirillo demonstrates that officers of Delaware corporations, whether or not they also act as directors, must be acutely aware of their duty of care – and of the fact that they do not have the protections as officers that are conferred on directors by the DGCL. Cirillo also brings to mind the added importance of directors’ and officers’ insurance for officers. And it reminds us that directors and officers of Delaware corporations should always seek the advice of Delaware counsel on matters of Delaware law.
James G. (Jay) McMillan is a partner in the Wilmington, Delaware office of Halloran Farkas + Kittila LLP. He concentrates his practice in complex corporate and commercial matters, with a particular focus on litigation in the Delaware Court of Chancery. For more information on the firm, visit hfk.law.