Leal v. Meeks
115 A.3d 1173
| Del. | 2015Background
- Two consolidated appeals (Cornerstone and Zhongpin) arise from controller-led going-private mergers where entire fairness review presumptively applied. Plaintiffs sued controlling stockholders, affiliated directors, and independent directors who negotiated/approved the deals.
- Both companies had Section 102(b)(7) charter provisions exculpating directors from monetary liability for duty-of-care breaches.
- Court of Chancery denied independent directors’ motions to dismiss, reading some language in Emerald Partners to require that independent directors remain defendants whenever entire fairness applies.
- Independent directors moved to dismiss for failure to plead non-exculpated (loyalty or bad faith) claims against them; plaintiffs argued entire fairness alone should keep independent directors in the case.
- Delaware Supreme Court granted interlocutory review to resolve whether plaintiffs must plead non-exculpated claims against exculpated independent directors to survive a motion to dismiss.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether independent directors protected by §102(b)(7) must face suit where transaction is subject to entire fairness | Entire fairness alone requires independent directors remain defendants; factual bases for disloyalty may be unknowable pre-discovery | Plaintiffs must plead non-exculpated claims (loyalty or bad faith) against each director to survive dismissal | Plaintiffs must plead non-exculpated claims against exculpated independent directors; otherwise dismissal is required |
| Standard for evaluating §102(b)(7) at pleading stage | §102(b)(7) should not bar dismissal when entire fairness issues are pled against controller and intertwined with director conduct | §102(b)(7) bars damages claims that allege only duty-of-care violations absent pleaded loyalty/bad-faith facts | §102(b)(7) may be invoked at pleading stage unless complaint alleges facts supporting a non-exculpated loyalty or bad-faith claim against that director |
| Effect of Emerald Partners language that seemed to defer §102(b)(7) rulings until after trial | Plaintiffs read Emerald II to mean independent directors cannot be dismissed whenever entire fairness applies | Defendants say Emerald Partners concerned cases where plaintiffs did plead non-exculpated loyalty/bad-faith claims; it does not alter Malpiede rule | Court narrows Emerald Partners: it does not require automatic denial of dismissal; its statements apply where viable non-exculpated claims against each director are pled |
| Procedural consequence on remand | Plaintiffs sought to keep all directors as defendants for discovery | Defendants sought dismissal of independent directors lacking non-exculpated claims | Court remanded for Court of Chancery to assess whether plaintiffs adequately pled non-exculpated claims against each independent director; if not, dismiss those directors |
Key Cases Cited
- Revlon v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 (Del. 1986) (establishes enhanced scrutiny in sale-of-control context)
- Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946 (Del. 1985) (sets standard for defensive measures under enhanced scrutiny)
- Malpiede v. Townson, 780 A.2d 1075 (Del. 2001) (plaintiff must plead non-exculpated loyalty or bad-faith claims to avoid §102(b)(7) dismissal)
- Emerald Partners v. Berlin, 726 A.2d 1215 (Del. 1999) (context for intertwined duty claims; factual issues may preclude §102(b)(7) relief)
- Emerald Partners v. Berlin, 787 A.2d 85 (Del. 2001) (clarifies that where non-exculpated loyalty claims against each director exist, §102(b)(7) may not allow dismissal)
- Kahn v. M & F Worldwide Corp., 88 A.3d 635 (Del. 2014) (defines safe-harbor process for controller transactions invoking business judgment rule)
- Weinberger v. UOP, Inc., 457 A.2d 701 (Del. 1983) (discusses entire fairness burden and fairness inquiry)