In the recent decision of Rudd v. Brown, et al., C.A. No. 2019-0775-MTZ (Del. Ch. Sept. 11, 2020), the Delaware Court of Chancery granted defendants’ motion to dismiss plaintiffs’ derivative claims in their entirety in light of an exculpatory provision in the corporation’s charter.
Plaintiffs’ derivative claims alleged that the company’s directors breached their fiduciary duties in connection with a $1.6 billion sale of Outerwall Inc., the owner of Redbox. Among other things, the suit claimed that Outerwall’s directors were motivated to take less than full value after a sizeable stockholder threatened a proxy fight to remove board members if they opposed a quick sale.
The Court ruled that plaintiff failed to adequately show the defendants were conflicted in pursuing the transaction. Vice Chancellor Zurn held that an exculpatory provision in Outerwall’s certificate of incorporation “bars any claims for monetary damages against the director defendants for duty of care violations committed in their capacities as directors.” Slip op. at 2.
The Court utilized an “enhanced scrutiny” of the acquisition under the Revlon standard, which is an intermediate review standard, established in Revlon v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 (Del. 1986). The standard falls between the business judgment review and the “entire fairness” standard.
The Court held that even under Revlon scrutiny, which is less friendly to a company’s directors then the business judgment rule, exculpatory charter provisions nonetheless shield directors from liability because the suit’s claims were “based only on duty of care violations.” Slip op. at 17. In light of the exculpatory provision, plaintiffs were required to file a non-exculpated claim, which the Court found they failed to do.
This decision demonstrates the significance of an exculpatory provision in a company’s corporate charter. As reflected herein, even claims subject to the less business-friendly Revlon standard may be subject to dismissal for breach of the fiduciary duty of care.
Carl D. Neff is a partner with the law firm of FisherBroyles, LLP, and practices in Delaware. You can reach Carl at (302) 482-4244 or at Carl.Neff@FisherBroyles.com.