Malone v. Brincat
| Decision Date | 18 December 1998 |
| Docket Number | No. 459, 1997.,459, 1997. |
| Citation | 722 A.2d 5 |
| Parties | Doran MALONE, Joseph P. Danielle and Adrienne M. Danielle, Plaintiffs below, Appellants, v. John. N. BRINCAT, Dennis H. Chookaszian, William C. Croft, Clifford R. Johnson, Andrew McNally, IV, Bruce I. McPhee, Fred G. Steingraber, Phillip J. Wicklander and KPMG Peat Marwick, LLP, Defendants below, Appellees. |
| Court | Supreme Court of Delaware |
William Prickett (argued), Ronald A. Brown, Jr., and Thomas A. Mullen, of Prickett, Jones, Elliott, Kristol & Schnee, Wilmington, Delaware; Arthur T. Susman, and Terrence Buehler, of Susman, Buehler & Watkins, Chicago, Illinois; and Clinton A. Krislov, of Krislov & Associates, Ltd., Chicago, Illinois, for appellants.
R. Judson Scaggs, Jr. (argued), Thomas R. Hunt, Jr. and Christopher F. Carlton, of Morris, Nichols, Arsht & Tunnell, Wilmington, Delaware; Garrett Johnson, and Dani R. James, of Kirkland & Ellis, Chicago, Illinois, for appellees, Dennis H. Chookaszian, William C. Croft, Clifford R. Jonson, Andrew McNally, IV, Bruce I. McPhee, Fred G. Steingraber and Phillip J. Wicklander.
Robert K. Payson, of Potter, Anderson & Corroon, Wilmington, Delaware; Steven F. Molo, Todd J. Ehlman, and P. Lee Berger, of Winston & Strawn, Chicago, Illinois, for appellee, John N. Brincat.
Allen M. Terrell, Jr. (argued) and Catherine G. Dearlove, of Richards, Layton & Finger, P.A., Wilmington, Delaware; Williams F. Lloyd, Linton J. Childs, of Sidley & Austin, Chicago, Illinois; Thomas C. Green, of Sidley & Austin, Washington, DC; and, Edwin D. Scott, of KPMG Peat Marwick LLP of New York City, for appellee, KPMG Peat Marwick LLP.
Before VEASEY, Chief Justice, WALSH, HOLLAND, HARTNETT and BERGER, Justices (constituting the Court en Banc). HOLLAND, Justice:
Doran Malone, Joseph P. Danielle, and Adrienne M. Danielle, the plaintiffs-appellants, filed this individual and class action in the Court of Chancery. The complaint alleged that the directors of Mercury Finance Company ("Mercury"), a Delaware corporation, breached their fiduciary duty of disclosure. The individual defendant-appellee directors are John N. Brincat, Dennis H. Chookaszian, William C. Croft, Clifford R. Johnson, Andrew McNally, IV, Bruce I. McPhee, Fred G. Steingraber, and Phillip J. Wicklander. The complaint also alleged that the defendant-appellee, KPMG Peat Marwick LLP ("KPMG") aided and abetted the Mercury directors' breaches of fiduciary duty. The Court of Chancery dismissed the complaint with prejudice pursuant to Chancery Rule 12(b)(6) for failure to state a claim upon which relief may be granted.
The complaint alleged that the director defendants intentionally overstated the financial condition of Mercury on repeated occasions throughout a four-year period in disclosures to Mercury's shareholders. Plaintiffs contend that the complaint states a claim upon which relief can be granted for a breach of the fiduciary duty of disclosure. Plaintiffs also contend that, because the director defendants breached their fiduciary duty of disclosure to the Mercury shareholders, the Court of Chancery erroneously dismissed the aiding and abetting claim against KPMG.
This Court has concluded that the Court of Chancery properly granted the defendants' motions to dismiss the complaint. That dismissal, however, should have been without prejudice. Plaintiffs are entitled to file an amended complaint. Therefore, the judgment of the Court of Chancery is affirmed in part, reversed in part, and remanded for further proceedings consistent with this opinion.
Mercury is a publicly-traded company engaged primarily in purchasing installment sales contracts from automobile dealers and providing short-term installment loans directly to consumers. This action was filed on behalf of the named plaintiffs and all persons (excluding defendants) who owned common stock of Mercury from 1993 through the present and their successors in interest, heirs and assigns (the "putative class"). The complaint alleged that the directors "knowingly and intentionally breached their fiduciary duty of disclosure because the SEC filings made by the directors and every communication from the company to the shareholders since 1994 was materially false" and that "as a direct result of the false disclosures ... the Company has lost all or virtually all of its value (about $2 billion)." The complaint also alleged that KPMG knowingly participated in the directors' breaches of their fiduciary duty of disclosure.
According to plaintiffs, since 1994, the director defendants caused Mercury to disseminate information containing overstatements of Mercury's earnings, financial performance and shareholders' equity. Mercury's earnings for 1996 were actually only $56.7 million, or $.33 a share, rather than the $120.7 million, or $.70 a share, as reported by the director defendants. Mercury's earnings in 1995 were actually $76.9 million, or $.44 a share, rather than $98.9 million, or $.57 a share, as reported by the director defendants. Mercury's earnings for 1994 were $83 million, or $.47 a share, rather than $86.5 million, or $.49 a share, as reported by the director defendants. Mercury's earnings for 1993 were $64.2 million, rather than $64.9 million, as reported by the director defendants. Shareholders' equity on December 31, 1996 was disclosed by the director defendants as $353 million, but was only $263 million or less. The complaint alleged that all of the foregoing inaccurate information was included or referenced in virtually every filing Mercury made with the SEC and every communication Mercury's directors made to the shareholders during this period of time.
Having alleged these violations of fiduciary duty, which (if true) are egregious, plaintiffs alleged that as "a direct result of [these] false disclosures ... the company has lost all or virtually all its value (about $2 billion)," and seeks class action status to pursue damages against the directors and KPMG for the individual plaintiffs and common stockholders. The individual director defendants filed a motion to dismiss, contending that they owed no fiduciary duty of disclosure under the circumstances alleged in the complaint. KPMG also filed a motion to dismiss the aiding and abetting claim asserted against it.
After briefing and oral argument, the Court of Chancery granted both of the motions to dismiss with prejudice. The Court of Chancery held that directors have no fiduciary duty of disclosure under Delaware law in the absence of a request for shareholder action. In so holding, the Court stated:
The federal securities laws ensure the timely release of accurate information into the marketplace. The federal power to regulate should not be duplicated or impliedly usurped by Delaware. 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 must seek a remedy under federal law.1
We disagree, and although we hold that the Complaint as drafted should have been dismissed, our rationale is different.
A motion to dismiss a complaint presents the trial court with a question of law and is subject to de novo review by this Court on appeal.2 This Court and the trial court must accept all well-pleaded allegations of fact as true.3 A complaint should be dismissed for failure to state a claim only when it appears "with a reasonable certainty that a plaintiff would not be entitled to the relief sought under any set of facts which could be proven to support the action."4
This Court has held that a board of directors is under a fiduciary duty to disclose material information when seeking shareholder action5:
It is well-established that the duty of disclosure "represents nothing more than the well-recognized proposition that directors of Delaware corporations are under a fiduciary duty to disclose fully and fairly all material information within the board's control when it seeks shareholder action."6
The majority of opinions from the Court of Chancery have held that there may be a cause of action for disclosure violations only where directors seek shareholder action.7 The present appeal requires this Court to decide whether a director's fiduciary duty arising out of misdisclosure is implicated in the absence of a request for shareholder action. We hold that directors who knowingly disseminate false information that results in corporate injury or damage to an individual stockholder violate their fiduciary duty, and may be held accountable in a manner appropriate to the circumstances.
An underlying premise for the imposition of fiduciary duties is a separation of legal control from beneficial ownership.8 Equitable principles act in those circumstances to protect the beneficiaries who are not in a position to protect themselves.9 One of the fundamental tenets of Delaware corporate law provides for a separation of control and ownership. The board of directors has the legal responsibility to manage the business of a corporation for the benefit of its shareholder owners.10 Accordingly, fiduciary duties are imposed on the directors of Delaware corporations to regulate their conduct when they discharge that function.11 The directors of Delaware corporations stand in a fiduciary relationship not only to the stockholders but also to the corporations upon whose boards they serve.12 The director's fiduciary duty to both the corporation and its shareholders has been characterized by this Court as a triad: due care, good faith, and loyalty.13 That triparte fiduciary duty does not operate intermittently but is the constant compass by which all director actions for the corporation and interactions with its shareholders must be guided.
Although the fiduciary duty of a Delaware director is unremitting, the exact course of conduct that...
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