Malpiede v. Townson

Supreme Court of Delaware · Corporations

CorporationsFiduciary dutiesMergers and acquisitionsDisclosureAiding and abettingSection 102(b)(7) exculpationRevlonduty of loyalty

Facts

Frederick's sought a buyer and initially agreed to a cash merger with Knightsbridge. After that agreement, higher unsolicited bids emerged from Milton and then Veritas, but Knightsbridge separately acquired the Trusts' large voting block and later increased its bid on restrictive terms that the board accepted, effectively ending the bidding process. The board then rejected Veritas's later $9.00 bid and issued an amended Consent Solicitation Statement describing these events. Plaintiffs alleged that the board favored Knightsbridge, made material disclosure errors, and that Knightsbridge aided the board's breach and interfered with stockholders' opportunity to receive Veritas's higher offer.

Issue

Whether the amended complaint stated claims for breach of the directors' duty of loyalty, disclosure violations, and due care, and whether Knightsbridge could be liable for aiding and abetting or tortious interference. Also at issue was whether Frederick's Section 102(b)(7) exculpatory charter provision could bar the due care damages claim at the pleading stage.

Rule

In a sale-of-control case, Revlon does not create a new fiduciary duty; plaintiffs still must plead facts supporting a breach of the traditional duties of care, good faith, or loyalty. A Section 102(b)(7) charter provision, when properly raised, bars monetary damages claims against directors based solely on alleged duty-of-care violations. Disclosure liability requires a substantial likelihood that the omitted or misstated fact would significantly alter the total mix of information available to a reasonable investor. Aiding and abetting requires a fiduciary relationship, a fiduciary breach, knowing participation in that breach by the third party, and proximate damages, and arm's-length bargaining alone does not constitute knowing participation.

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

Mesa Vista Apparel, Inc., a Delaware corporation based in Phoenix, hires a banker to explore a sale. After receiving several bids, its board accepts a cash merger with Prairie Summit Holdings and stockholders sue, alleging only that the directors failed to create a perfectly level auction and therefore violated their 'Revlon duties,' without pleading facts showing disloyalty, bad faith, or gross negligence.

Which is the strongest argument for dismissal of the complaint?

Explanation. The majority held that Revlon does not create a new fiduciary duty. It focuses directors on maximizing value, but plaintiffs still must plead facts supporting breach of traditional duties of care, loyalty, or good faith. A bare allegation that the board did not run an ideal auction is not enough by itself. (Derived from Malpiede v. Townson (n.d.).)