DealLawyers.com Blog

Delaware’s Corwin doctrine has become the first line of defense against many M&A fiduciary duty claims. But the Chancery Court’s recent decision in In re: USG Corp. Stockholders Litigation, (Del. Ch.; 8/20), demonstrates that even if Corwin doesn’t apply, directors may still be able to prevail on a motion to dismiss, thanks to charter provisions that exculpate them from liability for breach of the duty of care. Here’s the intro to this Cleary Gottlieb blog on the decision:

In a recent decision, the Delaware Court of Chancery found that the board omitted material information from its proxy statement recommending stockholders vote in favor of an all-cash acquisition of the company, and thus “Corwin cleansing” did not apply.  Nonetheless, the court dismissed all claims against the directors because the complaint failed to adequately allege that they acted in bad faith, as required by the company’s Section 102(b)(7) exculpation provision.

This decision provides helpful guidance regarding the kind of information that should be included in a merger proxy statement.  It also provides a reminder that Corwin is not the only defense available to directors at the motion to dismiss stage.  In particular, Section 102(b)(7) remains a powerful tool to support dismissal of stockholder claims against directors, even in cases where the proxy omits material information and/or the transaction is subject to “Revlon duties.”

The blog notes that one of the key takeaways from the case is that in order to avoid dismissal of a claim on the basis of a Section 102(b)(7) provision, the plaintiff must plead facts showing that the directors were interested in the transaction, were not independent of an interested party, or acted in bad faith. When it comes to pleading bad faith, it isn’t enough to allege that the directors didn’t comply with their obligations under Revlon.  Instead, the plaintiff “must plead facts showing that the directors intentionally or consciously breached their fiduciary duties.”

– John Jenkins