In Macrophage Therapeutics, Inc. v. Goldberg, C.A. No. 2019-0137-JRS (Del. Ch. June 23, 2021), the Delaware Court of Chancery held that defendant Michael M. Goldberg, M.D. (Dr. Goldberg), a former director and officer of Macrophage Therapeutics, Inc.’s (MT) parent company Navidea Biopharmaceuticals, Inc. (Navidea), engaged in self-interested transactions following a delay in the parties entering into certain agreements in breach of his fiduciary duties. However, the court found that MT was unable to show it suffered any real harm, and only awarded nominal damages. The court also declined to shift attorneys’ fees. This opinion demonstrates both that a party is not entitled to self-help when contract negotiations stall and that a breach of fiduciary duty that does not cause monetary harm may only result in nominal damages.

Background

In August 2018, the parties entered into an agreement in which Dr. Goldberg surrendered his preferred shares in MT’s parent entity Navidea. In exchange for surrendering his shares, Dr. Goldenberg was to receive a 5 percent stake in, and voting control of, MT. This transaction was part of a plan to create independence between MT and its parent. That independence, the parties hoped, would make MT more attractive to investors.

After the parties entered into the August agreement, they began efforts to negotiate definitive implementing agreements. However, as the court noted, the negotiations stalled, and “Dr. Goldberg became inpatient.” Instead of exercising his legal rights to enforce the August agreement, Dr. Goldberg formed a new entity named M1M2 Therapeutics, Inc. (M1M2), transferred MT’s primary asset to M1M2, granted himself a 5 percent stake in M1M2, and gave himself voting control of M1M2. Dr. Goldberg engaged in these transactions with M1M2 without any notice to Navidea or other MT stakeholders and with virtually no expert legal or financial advice. MT alleged that Dr. Goldberg’s actions (the Challenged Transactions), among other things, breached fiduciary duties.

Analysis

In a post-trial opinion, the Court of Chancery agreed that Dr. Goldberg had breached his fiduciary duties to MT – a point the court noted was “not hotly disputed.” The court ruled that since Dr. Goldberg stood on both sides of the Challenged Transactions, the “entire fairness” standard of review was appropriate. The entire fairness standard of review meant that Dr. Goldberg had the burden of demonstrating that the Challenged Transactions resulted from fair dealing and fair price. Dr. Goldberg proved neither.

Regarding the fair dealing, the court held that Dr. Goldberg took unilateral action without alerting the other members of MT’s Board of his transfer of MT’s primary asset.

Regarding the fair price, the court rejected Dr. Goldberg’s claim that the Challenged Transactions mirrored the parties’ agreements. The court found that Dr. Goldberg had transferred MT’s primary asset to an entity controlled by Dr. Goldberg, with no consideration from Dr. Goldberg or to MT for that transfer. In short, the court explained, “Dr. Goldberg attempted to take for himself that which belonged to [MT]. In doing so, he breached his duty of loyalty to [MT] stockholders.”

Notwithstanding Dr. Goldberg’s breach of the duty of loyalty, the court declined to award anything other than $1 in nominal damages. The court observed that the Challenged Transactions were unwound quickly after they were discovered. So MT suffered no cognizable damage. The court also declined to shift attorneys’ fees in favor of MT because, although wrong, Dr. Goldberg’s actions were not so egregious as to invoke the bad faith exception to the American Rule.

Key takeaways

When parties to a proposed transaction become impatient and resort to extra-contractual self-help rather than the legal remedies that are available to them, such action may be a breach of their fiduciary duty. However, even if that action is a breach of their duty, the Delaware Court of Chancery may only award nominal damages when the plaintiff cannot show that actual, cognizable harm resulted from the breach.