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Malone v. Brincat

    Brief Fact Summary.

    Malone (Plaintiff) and other stockholders alleged that Brincat (Defendant) and other directors of Mercury Finance Company, a Delaware corporation, overstated the company’s earnings and thereby breached their fiduciary duty of disclosure.

    Synopsis of Rule of Law.

    The fiduciary duties of care, loyalty and good faith apply when directors of a corporation distribute information to stockholders when no stockholder action is sought.

    Facts.

    Malone (Plaintiff) and other shareholders claimed that when Brincat (Defendant) and other directors inflated the company’s earnings intentionally, they breached their fiduciary duties.  The Court of Chancery held that, in the absence of a request for shareholder action, under Delaware law directors do not have a fiduciary duty of disclosure, and shareholders must seek a remedy under federal securities law.  The Court of Chancery dismissed the complaint with prejudice pursuant to rule 12(b)(6) for failure to state a claim upon which relief may be granted.  Plaintiff appealed.

    Issue.

    Do the fiduciary duties of care, loyalty and good faith apply when directors of a corporation distribute information to stockholders when no stockholder action is sought?

    Held.

    (Holland, J.)  Yes.  The fiduciary duties of care, loyalty and good faith apply when directors of a corporation distribute information to stockholders when no stockholder action is sought.  One or more of those duties could be violated when false information is distributed.  Directors who knowingly distribute false information that results in corporate injury or damage to an individual stockholder, are in violation of their fiduciary duty and may be held accountable in a manner appropriate to the circumstances.  If Malone (Plaintiff) intends to assert a derivative claim, he should be permitted to replead to assert a derivative claim.  The Court of Chancery properly dismissed the complaint against the individual director defendants, in the absence of well-plead allegations stating a derivative, class or individual cause of action and remedy.  However, we disagree with the Court of Chancery’s holding that such a claim cannot be articulated on these facts.  The case should have been dismissed without prejudice.  Reversed and remanded.

    Discussion.

    The court in this case determined that the plaintiffs should be allowed to amend their complaint.  Delaware law may provide a basis for equitable relief.  This court found that federal securities law may not be involved as the purchase or sale of securities was not at issue.



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