Emerald Partners v. Berlin

Supreme Court of Delaware · 2001 · Corporations

CorporationsEntire fairnessSection 102(b)(7)Fiduciary dutiesentire fairnessSection 102(b)(7)exculpationduty of care

Facts

Emerald Partners challenged a merger between May Petroleum, Inc. and thirteen corporations owned by Craig Hall, May's Chairman and CEO. Hall stood on both sides of the transaction, and at the time the merger agreement was entered he owned 52.4% of May's common stock, though he later reduced his holdings before the stockholder vote. In the prior appeal, the Delaware Supreme Court held that the complaint sufficiently alleged facts requiring entire fairness review of the directors' actions at trial. After remand and trial, the Court of Chancery held it was unnecessary to decide entire fairness because the directors' Section 102(b)(7) exculpatory charter defense barred monetary damages claims.

Issue

When a challenged transaction is subject to entire fairness review ab initio, may the Court of Chancery bypass the entire fairness analysis and decide first that directors are exculpated from monetary damages under a Section 102(b)(7) charter provision? Also, after the prior remand in this case, could the burden of proving entire fairness be treated as shifted to the shareholder plaintiffs absent a timely request and ruling?

Rule

If entire fairness is the applicable standard of judicial review ab initio, the court must first determine whether the transaction was entirely fair by examining fair dealing and fair price as a unitary inquiry. A Section 102(b)(7) charter provision functions in the nature of an affirmative defense and may exculpate directors from monetary damages only after the court has found the transaction unfair and identified the fiduciary breach or breaches on which liability rests; it cannot eliminate the need for an entire fairness analysis. In this case, because the director defendants did not obtain a pretrial or trial ruling shifting the burden, they retained the burden of proving entire fairness throughout trial.

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Cedar Basin Logistics, a Delaware corporation based in Tulsa, agreed to buy warehouses from an entity wholly owned by its chair, Nolan Price. Stockholders sue the directors for monetary damages, and the court determines at the outset that the deal must be reviewed for entire fairness because the transaction is inherently interested. Cedar Basin's charter contains a valid Section 102(b)(7) exculpatory provision.

How should the court proceed?

Explanation. When entire fairness applies ab initio, the court cannot bypass that analysis by invoking a Section 102(b)(7) provision. Entire fairness requires judicial scrutiny first; only after a finding that the transaction was not entirely fair and after identifying the fiduciary breach supporting monetary liability may exculpation be considered. Section 102(b)(7) can bar damages only for liability based exclusively on duty-of-care violations.