McPadden v. Sidhu
964 A.2d 1262 (Del.Ch. 2008)

  • The directors of a corporation called i2 sold off one of their subsidiaries (a corporation called TSC) to a group on investors led by TSC’s VP, Duberville. The sale price was $3M.
    • The directors had decided to sell TSC because it didn’t fit in with their core business model. They appointed Duberville to conduct the sales process.
  • Two years later, Duberville turned around and sold TSC to another company for $25M.
    • Duberville had significantly reduced projections of revenues and income when recommending to i2′s directors how much TSC was worth, and Duberville didn’t solicit bids from outside investors to determine what the market price of TSC was.
  • i2′s shareholders, led by McPadden filed a derivative lawsuit against i2′s directors, led by Sihdu, as well as Duberville for breach of fiduciary duty.
    • i2′s shareholders argued that allowing TSC to be sold to members of TSC’s management for a fraction of what it was worth constituted breach of the duty of good faith.
  • The Trial Court dismissed the complaint against the directors, allowed the complaint against Duberville.
    • The Trial noted that under Delaware law, DGCL §102(b)(7), i2′s charter had an exculpatory provision limiting the personal liability of directors for certain conditions.
      • §102(b)(7) is limited to breaches of the duty of care (which is usually defined as gross negligence). It cannot be used to limit liability to directors that breach the duty of good faith.
    • The Court found that gross negligence alone, cannot constitute bad faith, and that a board of directors could “act badly” without acting in bad faith.
      • The Court found that in order to qualify as a breach of the duty of good faith (and thus not be covered by §102(b)(7)), there must be either actions that are motivated by subjective bad intent, or there must be conduct that rises to “the intentional dereliction of duty or the conscious disregard for one’s responsibilities.”
    • The Court looked to the facts of the case and found that the directors may have been grossly negligent, but there was no intentional dereliction of duty and so they were covered by §102(b)(7)).
    • However, the Court found that §102(b)(7)) is only applicable to directors, and not to officers of the company, so it did not cover Duberville. The Court found that Duberville’s actions were a breach of the duty of care, and so he was potentially liable for damages from his actions.
  • Under Delaware law, the duty of care is a “process” standard. It doesn’t matter what the result is, all that is required that there is a reasonable process for decision, it doesn’t matter what the results are.