Malone v. Brincat

Supreme Court of Delaware · Corporations

Corporationsfiduciary dutydisclosuredirector communicationsdirect vs. derivative claimsfiduciary dutyduty of disclosuregood faith

Facts

Plaintiffs alleged that Mercury's directors repeatedly overstated the company's earnings, financial performance, and shareholders' equity in SEC filings and shareholder communications from 1993 forward. The complaint alleged the directors knowingly and intentionally made materially false disclosures and that, as a direct result, the company lost all or virtually all of its value, about $2 billion. Plaintiffs sued on behalf of themselves and a putative class of Mercury stockholders, and also asserted that KPMG knowingly participated in the directors' misconduct. The complaint, however, did not clearly plead a derivative claim on behalf of the corporation, compliance with Rule 23.1, or a properly articulated individual or class remedy.

Issue

Whether Delaware directors may breach fiduciary duties by knowingly disseminating false information to shareholders when no shareholder action is being requested, and whether this complaint adequately stated such a claim. Also, whether the aiding and abetting claim against KPMG could stand absent a well-pleaded underlying fiduciary breach claim.

Rule

When directors seek shareholder action, they must disclose fully and fairly all material information within the board's control. Even when no shareholder action is sought, directors who knowingly disseminate false information to shareholders, either publicly or directly, violate fiduciary duties because directors owe shareholders honesty, due care, good faith, and loyalty at all times. In the nonaction context, such misconduct may support a derivative claim, an individual damages action, or equitable relief, but the complaint must properly plead the nature of the claim and an assertable remedy.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

Lakefront Robotics, Inc., a Delaware corporation based in Chicago, sends annual letters to shareholders stating that its flagship product passed all safety tests and that the company is financially strong. No vote, tender offer, or other shareholder decision is pending. The board allegedly knew both statements were false, and when the truth emerged, the corporation lost major contracts and its enterprise value plunged.

Under Delaware fiduciary law as described by the majority, which is the best assessment of the shareholders' claim against the directors?

Explanation. The majority held that directors owe shareholders honesty whenever they communicate publicly or directly with shareholders, with or without a request for shareholder action. In the nonaction context, knowingly disseminating false information can violate fiduciary duties and may support derivative, individual, or equitable relief depending on the injury and pleading. The court rejected the view that Delaware fiduciary law is wholly inapplicable absent a shareholder vote or other requested action. (Derived from Malone v. Brincat (n.d.).)