In this letter opinion, the Delaware Court of Chancery denied in part and granted in part a motion for judgment on the pleadings pursuant to Court of Chancery Rule 12(c) (the “Motion”) brought by defendant SRA International, Inc. (“SRA”), and several members of its pre-merger board (the “Individual SRA Defendants,” and together with SRA, the “SRA Defendants”) finding that while the Southeastern Pennsylvania Transportation Authority (“SEPTA”) is procedurally barred from challenging SRA’s capacity to enter into a merger, SEPTA may still state a direct claim that the SRA Defendants breached their fiduciary duty of loyalty by entering into a merger in violation of SRA’s certificate of incorporation.
The SRA Defendants brought the Motion in response to the complaint (the “Complaint”) filed by SEPTA, a former stockholder of SRA, challenging the merger of SRA and affiliates of Defendant Providence Equity Partners LLC (the “Merger”). Specifically, Count IV of the Complaint alleged that the Merger was invalid because it provided for disparate consideration among shares in contravention of SRA’s certificate of incorporation. Count IV further alleged that by approving the invalid Merger in violation of SRA’s certificate of incorporation the Individual SRA Defendants breached their fiduciary duty of loyalty. The Complaint initially sought injunctive relief, however SEPTA abandoned that effort and the Merger has been consummated.
By their Motion, the SRA Defendants argued that the claim presented in Count IV fails as a matter of law because it is procedurally barred by 8 Del. C. § 124. That provision states that a claim that corporate action is “invalid by reason of the fact that the corporation was without capacity or power” must be brought as a claim for (i) injunctive relief; (ii) as a derivative claim; or (iii) a claim initiated by the Attorney General. SEPTA responded, and the Court agreed, that Count IV presented two claims – a contract claim and a fiduciary duty claim.
The Court first noted that under Court of Chancery Rule 12(c) judgment on the pleadings will be granted “if the pleadings fail to reveal the existence of any disputed material fact and the movant is entitled to judgment as a matter of law.” This standard is nearly identical to the standard for a Court of Chancery Rule 12(b)(6) motion to dismiss.
In resolving the Motion, the Court stated the intent of 8 Del. C. § 124 was to prevent both corporations and those contracting with them from avoiding contracts that could be classified as outside the scope of the corporation’s authorized powers. To that end, 8 Del. C. § 124 simply provides that acts will be deemed valid and that the corporation’s capacity to undertake them may not, except in three limited instances, be challenged. However, 8 Del. C. § 124 does not bar all challenges to the acts it covers; it merely provides that certain acts may not be set aside because they are ultra vires. Even if action by a corporation is deemed valid and effective under 8 Del. C. § 124, such action may nevertheless constitute a breach of fiduciary duty. Thus, the Court ultimately found that even though SEPTA may not challenge the validity of the Merger or even challenge SRA’s capacity to enter the Merger pursuant to 8 Del. C. § 124, SEPTA may nevertheless state a direct claim that the Individual SRA Defendants breached their fiduciary duties by approving the Merger, which allegedly violated SRA’s certificate of incorporation.
The full opinion is available here.