January 10, 2020

Chancery Court Refuses to Dismiss Duty of Care Claims Against GC

In Morrison v. Berry, (Del.; 12/18), the Delaware Supreme Court reversed an earlier Chancery Court ruling and refused to dismiss a shareholder plaintiff’s claims alleging that disclosures related to the relationship between the company’s founder & the PE firm that ultimately acquired the company, together with other matters relating to his role and actions in the board’s sale process were misleading.

The case returned to the Chancery Court, which decided various motions to dismiss at the end of last month. There’s a lot going on in Vice Chancellor Glasscock’s 72-page opinion, and we’re likely to revisit it in the coming weeks, but this recent blog from Stinson’s Steve Quinlivan focuses on the Court’s response to a motion to dismiss breach of fiduciary duty claims targeting the company’s General Counsel.

While the plaintiff asserted a variety of claims against the GC premised on alleged breaches of the duty of care and loyalty, VC Glasscock dismissed all of them – with the exception of allegations that the General Counsel violated his duty of care in preparing the disclosures in the company’s Schedule 14D-9 filing. This excerpt from the blog discusses this aspect of the Vice Chancellor’s opinion:

Turning to the claim of gross negligence, the Court noted “Because fiduciaries . . . must take risks and make difficult decisions about what is material to disclose, they are exposed to liability for breach of fiduciary duty only if their breach of the duty of care is extreme.” Given the omissions noted by the Supreme Court, the Court observed the Schedule 14D-9 offers stockholders a version of events that left them lacking information material to a decision.

The Vice Chancellor concluded that the extent of the alleged disclosure shortcomings created a reasonable inference that the GC may have conceivably acted with gross negligence in his role with regard to the 14D-9.  However, the blog notes that he also observed that “another reasonable interpretation is that the Schedule 14D-9 represents a good faith but failed effort to make reasonable disclosures, but given the pleading stage, the Court must choose the inference favoring the Plaintiff.”

It’s worth noting that disclosure claims relating to the 14D-9 were also asserted against the directors, but they were dismissed because, like most Delaware corporations, the company included a Section 102(b)(7) provision in its charter eliminating directors’ monetary liability for breaches of the duty of care.  That protection does not extend to corporate officers.

John Jenkins