In re Cornerstone Therapeutics Inc. Stockholder Litigation (Del. May 14, 2015) is a welcome development for independent directors who approve M&A transactions, adopt takeover defenses or approve transactions with controlling stockholders. In this decision, the Delaware Supreme Court held that, regardless of the underlying standard of review for the board’s conduct—business judgment rule, entire fairness, Unocal, etc.—a suit for monetary damages against a director who is protected by a Section 102(b)(7) exculpatory charter provision will be dismissed unless the plaintiff pleads facts suggesting that the director engaged in non-exculpated conduct (e.g., breached the duty of loyalty or acted in bad faith). This case also serves as a reminder of two fundamental tenets of Delaware law: (i) where directors face claims for damages in a suit challenging board action, each director is considered individually and (ii) independent directors are presumed to have acted in accordance with their fiduciary duties.
This decision helps to ensure that independent directors do not have an incentive to reject transactions or a disincentive to serve as special committee members, simply because of the risk of protracted litigation. In addition, this decision may result in lower settlement values with respect to such actions. However, directors should bear in mind the following:
- The holding is limited to suits for monetary damages. If equitable relief is a viable remedy (as is typically the case in pre-closing M&A litigation), the exculpatory charter provision may not lead to the same result of dismissal.
- Following the dismissal of a suit against a director defendant on a motion to dismiss, plaintiffs may amend their complaints if they subsequently obtain sufficient evidence to plead non-exculpated claims against that director defendant.
- Even if independent directors are not subject to suit for monetary damages, they will still be subject to discovery in fiduciary duty litigation, including in connection with ongoing suits against non-independent directors and in connection with the determination as to the appropriate standard of review and which party bears the burden of proof (e.g., in an entire fairness case).