Corporate Law Case: McPadden vs. Sidhu (Court of Chancery Delaware), 964 A. 2d 1262 (2008), USA.
Case: Relating to Fiduciary Duty
Plaintiff: McPadden
Defendant: Sidhu (Court of Chancery Delaware)
Case citation: 964 A. 2d 1262 (2008)
This case is relating to a shareholder derivative action involving breach of fiduciary duty.
Facts of the Case:
i2 Technologies decided to sell its subsidiary, TSC. The board appointed Dubreville to manage the sale process, even though it knew that he was personally interested in buying TSC.
Dubreville did not properly market the subsidiary. He failed to contact several potential buyers, including a competitor that had previously offered up to $25 million for TSC. His own group eventually became the only serious bidder.
The board received a fairness opinion containing different valuations of TSC. An earlier projection valued TSC at $6–10.8 million, while a later projection valued it at $3–7 million. Despite this, the board approved the sale to Dubreville’s group for only $3 million.
A shareholder brought a derivative action against the directors and Dubreville. The plaintiff alleged breach of fiduciary duty and unjust enrichment. He did not make a demand on the board, arguing that such demand would have been futile.
Legal Issues:
- Whether the shareholder was required to first ask the board to take legal action.
- Whether the directors’ conduct amounted to gross negligence or bad faith.
- Whether the directors were protected by the company’s DGCL §102(b)(7) exculpatory provision.
- Whether the same protection applied to Dubreville as an officer.
Decision of the Court:
The Delaware Court of Chancery held that the shareholder did not need to first ask the board to take legal action. The board had failed to properly deal with Dubreville’s conflict of interest and the problems in the sale process.
The claims against the directors were dismissed. The Court found that their conduct was gross negligence, not bad faith. Therefore, the company’s §102(b)(7) provision protected them from monetary liability.
The claims against Dubreville were allowed to continue. The Court held that §102(b)(7) protects directors, not corporate officers. Therefore, Dubreville could not use the provision as a defence.
Principles Established:
- A shareholder need not first ask the board to take legal action when the board’s independence or decision-making is reasonably in doubt.
- Gross negligence and bad faith are different.
- A company’s §102(b)(7) provision can protect directors from monetary liability for negligence in performing their duties.
- This protection applies to directors, not corporate officers.
- Directors must properly consider known conflicts of interest and serious problems in corporate transactions.
