Malone v. Brincat
722 A.2d 5 (Del.Supr. 1998)

  • The directors of Mercury (along with their auditor KPMG) were releasing reports containing overstatements of Mercury’s earnings and assets. As a result of these overstatements, Mercury lost virtually all of its value and its shareholders lost a lot of money.
  • The shareholders filed a class action lawsuit against the directors and KPMG.
    • The shareholders argued that the directors had breached their fiduciary duty by not disclosing the actual financial state of the corporation.
    • The directors argued that under Delaware State law, there owed no fiduciary duty of disclosure to the shareholders.
  • The Trial Court found for the directors. The shareholders appealed.
    • The Trial Court found that the directors have no fiduciary duty of disclosure in the absence of a request for shareholder action.
    • The Court found that when a shareholder is damaged merely as a result of the release of inaccurate information into the marketplace, unconnected with any Delaware corporate governance issue, that shareholder needs to seek remedy under Federal law, not Delaware law.
  • The Appellate Court affirmed in part and reversed in part.
    • The Appellate Court found that unless there is a request for shareholder action, there is no duty to disclose.
    • However, the Court found that directors who knowingly disseminate false information that results in corporate injury to an individual stockholder have violated their fiduciary duty.
      • The Court noted that the directors had breached their fiduciary duty of loyalty and good faith.
    • The Court found that there was some ambiguity as to whether the shareholders were bringing a class-action suit or a derivative suit. So they dismissed the complaint and told the shareholders to better explain what they wanted and try again.
  • Basically, this case stands for the proposition that directors have a duty to speak truthfully whenever they choose to speak, whether or not shareholder action is required.