The Delaware Supreme Court clarified (a few days ago) several of its prior decisions in connection with what damages are available for a breach by the board of directors of their disclosure obligations, especially in connection with proxies. In the case of In Re J.P. Morgan Chase & Co. Shareholder Litigation, download opinion, the Supreme Court addressed the partial appeal of a trial court decision that rejected disclosure claims due, in part, to the absence of provable damages. The aspect of the Chancery Court opinion that was not appealed from, dismissed claims based on a failure to plead demand futility under Chancery Court Rule 23.1. The case arose from the merger between J.P Morgan Chase and Bank One.
The Chancery Court’s decision was summarized last year on my blog here. Plaintiffs argued that violation of the duty of disclosure, without more, automatically entitles the affected shareholders to a damages recovery. They relied on footnote 27 of Malone v. Brincat, 722 A.2d 5,12 (Del. 1998).
The plaintiffs also relied, incorrectly according to the Court, on its prior decisions of In Re Tri-Star Pictures, Inc., 634 A.2d 319 (Del. 1983) and Louden v. Archer-Daniels-Midland Co., 700 A.2d 135, 141 (Del. 1997).
The defining quote in the case is as follows:
Therefore, Tri-Star stands only for the narrow proposition that, where directors have breached their disclosure duties in a corporate transaction that has in turn caused impairment to the economic or voting rights of stockholders, there must at least be an award of nominal damages. Tri-Star should not be read to stand for any broader proposition. (emphasis in original)
This clarifies and in some ways rejects the original, less complete, footnote 27 in Malone v. Brincat that some read as a per se rule requiring at least nominal damages for any violation of disclosure duties. The above quote was a “revision” of footnote 27 in the Malone case, to add more complete language from the Louden case that was referred to in a more terse way in the original footnote, and to make it clear what the Supreme Court intended to say.