Robert Lenois v. Kase Lukman Lawal, 11963-VCMR

Background

Erin Energy (Delaware corp.) negotiated transactions where PIC would invest cash in Erin and Erin would transfer cash, stock, a subordinated note, and contingent payments to Allied (a controller‑affiliated company) in exchange for Allied’s remaining oil mining lease interests. Controller Kase Lawal negotiated for Erin, Allied, and as intermediary with PIC.
Lawal and CEHL together controlled a majority of Erin pre-transaction; Lawal allegedly dominated the process, pressured the board, withheld information, and promised PIC a fixed share amount.
The Erin board formed a Special Committee (three independent directors) that retained independent counsel and financial advisor (Canaccord), negotiated counterproposals, obtained cash for the company, and ultimately received a fairness opinion concluding the Final Proposal was fair. The board and a majority‑of‑the‑minority stockholders approved the Transactions.
Plaintiff (Lenois) filed a derivative suit without making a pre‑suit demand, alleging breaches of fiduciary duty (disloyalty/bad faith and care failures) and direct disclosure claims, and later supplemented alleging Allied had only paid $100M of an earlier $250M purchase price.
Erin’s certificate contained a Section 102(b)(7) exculpatory charter clause insulating directors from monetary liability for duty‑of‑care breaches (gross negligence), leaving non‑exculpated claims (bad faith/loyalty) as the main path past demand futility.
The Court granted defendants’ motion to dismiss: demand was not excused because plaintiff failed to plead particularized non‑exculpated claims against a majority of the board; direct disclosure claims were dismissed because alleged damages would flow to the corporation.

Issues

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether demand is excused under Aronson’s second prong given an exculpatory charter	Lenois: allegations of Lawal’s bad faith, a dominated process, inadequate information to the board, or grossly negligent deliberation excuse demand without showing a majority face non‑exculpated liability	Defendants: where a §102(b)(7) charter exculpates care claims, plaintiff must plead particularized non‑exculpated claims against a majority of the board to excuse demand	Court: Agreeing with weight of authority, demand is not excused unless plaintiff pleads a substantial likelihood of liability for non‑exculpated claims against a majority of the board
Whether allegations that Lawal acted in bad faith make demand futile as to the board	Lenois: Lawal’s control and apparent self‑dealing infected the process and supports futility (including single‑director bad faith theories)	Defendants: Lawal’s alleged bad faith does not defeat board’s ability to act unless a majority face non‑exculpated liability	Held: Lawal’s alleged bad faith was pleaded, but plaintiff failed to show comparable non‑exculpated claims against a majority of directors, so demand not excused
Whether the Special Committee’s process and reliance on Canaccord/fairness opinion show board acted in bad faith or was uninformed	Lenois: the committee was misled, relied on incomplete/conflicted information, and Canaccord’s analyses showed Erin overpaid, so care/loyalty failures excuse demand	Defendants: Special Committee negotiated, obtained advisors, pushed back on terms, secured cash and better terms—process was adequate and Canaccord’s opinion was not shown to be knowingly false	Held: The Special Committee’s conduct and reliance on advisors do not demonstrate conscious disregard or scienter; allegations do not meet the high bad‑faith or gross‑negligence standard needed to overcome §102(b)(7) protection
Whether direct disclosure claims in the proxy can proceed as direct claims seeking rescissory damages	Lenois: proxy omissions deprived stockholders of an informed vote and rescissory damages are sought (direct claim)	Defendants: if damages flow to the corporation, the claim is derivative and barred as direct relief; rescissory damages would flow to the company	Held: Direct disclosure claims dismissed—rescissory damages alleged would flow to Erin, not to individual stockholders, so plaintiff has no direct claim under J.P. Morgan doctrine

Key Cases Cited

Aronson v. Lewis, 473 A.2d 805 (Del. 1984) (sets forth two‑prong test for demand futility when board approval is challenged)
Rales v. Blasband, 634 A.2d 927 (Del. 1993) (frames demand‑futility inquiry where board composition changes; focus on whether board can exercise independent business judgment)
In re Walt Disney Co. Derivative Litigation, 825 A.2d 275 (Del. Ch. 2003) (defines bad faith spectrum and standards for pleading intentional dereliction of duty)
Guttman v. Huang, 823 A.2d 492 (Del. Ch. 2003) (holds that where §102(b)(7) exculpation exists, plaintiff must plead non‑exculpated claims against directors to show substantial likelihood of liability)
In re J.P. Morgan Chase & Co. Shareholders Litigation, 906 A.2d 766 (Del. 2006) (explains when disclosure claims are direct; damages that flow to the corporation are derivative and not recoverable directly by stockholders)