Sutherland v. Sutherland, C.A. No. 2399-VCN (Del. Ch. May 30, 2013).
Issue Addressed: Whether certain directors violated their fiduciary duties by benefiting from a system of charging for administrative expenses for personal matters that was more favorable to certain directors.
Short Answer: No.
Background: Many prior Delaware decisions in this long-running internecine family business dispute have been highlighted on these pages. See, e.g., this link. This latest installment also addresses the important principle that a books and records action under Section 220 may toll a claim that is related to the books and records demand. See footnote 64.
Under Delaware law the statute of limitations is tolled for claims of wrongful self-dealing until an investor knew or had reason to know of the facts constituting the wrong. See footnote 66.
Footnote 70 has a further explanation of when a Section 220 case might toll the statute of limitations and in this case in particular, the court determined that notwithstanding the arguments about whether the 220 action would toll the statute of limitations, because the plaintiff filed her original complaint within three years of the earliest date that she would have inquiry notice of any potential wrongful self-dealing, her claim in this matter regarding the flat-fee system is not barred. The court similarly rejected the laches argument.
No Waiver for Failure to Make Allegations against All Directors
The court disregarded arguments that the claims against only two of the directors were waived because the plaintiff shareholder did not believe that a former director, her deceased father, had breached any fiduciary duties. The opinion explains that the decision about whether a director violated his fiduciary duties is for the court, not for the parties to make. Moreover, the court explained that a:
“daughter may assess her father’s conduct in different ways and for different reasons. It is understandable that a daughter might seek to avoid accusing her (deceased) father of wrongdoing, and that human impulse may impair her capacity to draw proper conclusions about his conduct. In any event, Martha’s apparent concessions about her father’s actions – – admittedly not all different from those of [her brothers and current directors] Perry and Todd – – does not bar her fiduciary duty claims asserted at trial.”
The court discussed the well known principles underpinning the business judgment rule and the presumptions that is provides. The court explained that in order to rebut that presumption, the plaintiff must introduce evidence either of director self interest, if not self-dealing, or that the director either lacked good faith or failed to exercise due care. If the plaintiff fails to meet that burden or establish facts rebutting the presumption, the business judge rule, “as a substantive rule of law, will attach to protect the directors and the decisions they make.” See footnote 88. Only when the business judgment rule is rebutted will the burden shift to the defendants to demonstrate the entire fairness of the challenged transaction.
The Court of Chancery explained that self-dealing requires more than the receipt of the benefit from a transaction. Rather, self-dealing “requires that such benefit not be generally available to other stockholders.” Moreover, the benefit must be material. In order for allegations of self-interest to rebut the business judgment rule, a stockholder must show that the director’s self-interest “materially affected their independence.” That type of materiality requires that the benefit be “significant enough in the context of the director’s economic circumstances, as to make it improbable that the director could perform her fiduciary duties to the shareholders without being influenced by her overriding personal interest. To be disqualifying, the nature of the director interest must be substantial, not merely incidental.” See footnote 95.
The court conducted an extensive review of the charges to the various shareholders and directors for the work performed and billed on a flat-fee basis, and concluded that the plaintiff shareholder did not establish by a preponderance of the evidence that the flat-fee system was a material benefit to the directors being challenged. Thus she did not rebut the business judgment rule presumption and the defendants did not have the burden of proof shifted to them to justify their actions under the entire fairness standard.
The court also rejected, after careful discussion, the claims that there was a breach of the duty of care because Perry and Todd allegedly failed to inform themselves about the bills and fees generated under the flat fee system.
The court explained that for a board to be informed,
“it need not know every single fact relating to a transaction. A board only needs to consider material facts that are reasonably available, those that are relevant and of the magnitude to be important to directors in carrying out their fiduciary duty of care and decision making. There is no prescribed procedure or any special method that must be followed to satisfy the duty of due care. The standard to determine whether a board’s decision is informed is gross negligence. In the duty of care context, gross negligence is conduct that constitutes reckless indifference or actions that are without the bounds of reason.”
Moreover, the court explained that “in the duty of care context, DGCL Section 141(e) protects directors who rely in good faith upon information presented to them from various sources, including any other person as to matters a member reasonably believes are within such person’s professional or expert competence and who has been selected with reasonable care by and on behalf of the corporation.”
The court found that tax professionals and other experts were relied upon and Perry and Todd, and they reasonably believed that those opinions they received were within the professional competence of the advisors. Section 141(e) protects defendants against any claim that they may have violated their duty of care.
Attorneys’ Fees and Costs
The court retained jurisdiction to address whether Martha should recover attorneys’ fees for her success on certain claims pursued in this action and in which she was successful, as explained in prior opinions, such as amendments made to the employment agreements of Perry and Todd. See Sutherland v. Sutherland, 2010 WL 1838968 (Del. Ch. May 3, 2010) (summary judgment opinion).