The Delaware Court of Chancery recently addressed the pleading standard for claims against disinterested directors arising out of transactions involving a controlling stockholder, where the transaction has been alleged to be unfair to the minority shareholders. The court held that the entire fairness standard of review applies to an allegedly unfair, interested shareholder transaction and precludes dismissal of the disinterested director at the pleading stage, even in the face of an exculpatory charter provision under 8 Del. Code § 102(b)(7). The court found that specific allegations of breaches of loyalty or bad faith are not required to overcome a motion to dismiss. Further, the determination whether the disinterested directors are insulated from liability under the exculpatory provision may only be made on a fully developed factual record.The lawsuit arose out of a merger between Cornerstone Therapeutics, a publicly traded Delaware pharmaceutical company, and Chiesi Farmaceutici, a privately held Italian drug manufacturer. When Chiesi was the beneficial owner of 65.4 percent of Cornerstone common stock, it offered to acquire all of the outstanding shares of Cornerstone common stock. The Cornerstone board formed a Special Committee of five disinterested directors to review the offer. After months of negotiations over the terms of the acquisition, Chiesi and the Special Committee reached an agreement, and the merger was thereafter approved by more than 80 percent of the minority stockholders. This was not a pre-existing condition of the deal. Plaintiffs subsequently filed complaints alleging three counts against the directors, Chiesi and the company, including claims of breach of fiduciary duty against the disinterested directors who either served on the Special Committee or voted to approve the transaction. The disinterested directors moved to dismiss, arguing that plaintiffs failed to plead specific facts to suggest that each individual disinterested director breached a non-exculpated duty.
The court denied the motion after thorough consideration of the underpinnings and development of the Delaware doctrine of entire fairness review, which applies where a controlling shareholder stands on both sides of a transaction. In that circumstance, proof that the transaction is entirely fair to the corporation is necessary and the deference of the business judgment rule is unavailable. A recent Delaware Supreme Court decision refined the law further, holding that if a transaction involving a controlling shareholder is conditioned at the outset on the approval of both a special committee of disinterested shareholders and a majority of minority stockholders, the business judgment rule is applicable, thereby putting the burden on the plaintiff to allege a breach of fiduciary duty by the disinterested shareholder. In this case, both conditions were not met and the court found that the pleading was sufficient to withstand a motion to dismiss even without specific allegations of breached duties of loyalty or bad faith with respect to each individual director. The complaint alleged that the interested shareholder had control over the corporate machinery (the majority of votes and composition of the board), which was used to review and approve the deal and the disinterested directors negotiated or facilitated an unfair transaction. The determination of whether the directors were exculpated in the event the transaction was found to be unfair would be made only after a fully developed factual record.
In re Cornerstone Therapeutics Inc. Stockholder Litig., No. 8922-VCG (Del. Ch. Sept. 10, 2014).