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
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
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