In re Cornerstone Therapeutics Inc. Stockholder Litigation: Delaware Supreme Court Holds That Plaintiffs Seeking Monetary Damages Must Plead Non-Exculpated Claims Against Disinterested Directors to Survive Motion to Dismiss by Those DirectorsSullivan & Cromwell LLP - May 18, 2015
In a decision issued on May 14, 2015, the Delaware Supreme Court held that a plaintiff seeking only monetary damages against a director who is protected by an exculpatory charter provision must plead duty of loyalty/bad faith claims to survive a motion to dismiss, regardless of the underlying standard of review for the board’s conduct (whether Revlon, Unocal, entire fairness or business judgment) and regardless of whether the transaction is an interested transaction. In so holding, the Delaware Supreme Court reversed the Chancery Court decisions in In re Cornerstone Therapeutics Inc. Stockholder Litigation and In re Zhongpin Inc. Stockholders Litigation, in which the Chancery Court reluctantly held that Delaware Supreme Court precedent required that all directors remain defendants until the end of litigation if a plaintiff states a non-exculpated claim against interested parties in connection with a transaction subject to entire fairness review, and remanded the cases to the Chancery Court to determine whether the plaintiffs had sufficiently pled non-exculpated claims of breaches of fiduciary duty against the independent directors to survive a motion to dismiss.
The Delaware Supreme Court’s ruling in Cornerstone affirms that giving all claims against directors a free pass at the pleading stage in an interested party transaction would be tantamount to a holding that all directors are presumed disloyal until proven otherwise. The Court noted that this has never been Delaware law and that as a practical matter, such a holding would impose disincentives on board service. The decision will provide independent, disinterested directors who can avail themselves of charter exculpation provisions with added protection against protracted and costly litigation involving a controlling stockholder and remove from plaintiffs at the outset of a case a potential insurance settlement pool, particularly in cases where the transaction is subject to entire fairness review.