Citation. Malone v. Brincat, 722 A.2d 5, 1998)
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Brief Fact Summary.
Doran Malone, Joseph P. Danielle, and Adrienne M. Danielle, (Appellants), filed this individual class action against the directors of Mercury Finance Company, (Appellees). The Court of Chancery dismissed the complaint with prejudice for failure to state a claim upon which relief may be granted. Appellants appeal.
Synopsis of Rule of Law.
Whenever directors communicate publicly or directly with shareholders about the corporation’s affairs, with or without a request for shareholder action, directors have a fiduciary duty to shareholders to exercise due care, good faith and loyalty. When directors communicate publicly or directly with shareholders about corporate matters, the sine qua non of directors’ fiduciary duty to shareholders is honesty.
Facts.
Appellants filed this individual class action alleging that Appellees breached their fiduciary duty of disclosure by intentionally overstating the financial condition of the corporation on repeated occasions to its shareholders. Appellants allege that as a direct result of these false disclosures, the company lost virtually all of its value of about $2 billion. The Court of Chancery dismissed the complaint with prejudice for failure to state a claim upon which relief may be granted.
Issue.
Whether a director’s fiduciary duty arising out of misdiclosure is implicated in the absence of a request for shareholders action.
Held.
Yes. 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.
Discussion.
The director’s fiduciary duty to both the corporation and its shareholders is a combination of due care, good faith, and loyalty. The focus of the fiduciary duty of disclosure is to protect shareholders as the “beneficiaries” of al material information disseminated by the directors. Shareholders are entitled to rely upon the truthfulness of all information disseminated to them by the directors elected to manage the corporation. Here, Appellants never expressly assert a derivative claim on behalf of the corporation or allege compliance with the Court of Chancery Rule 23.1 which requires pre-suit demand or cognizable and particularized allegations that demand is excused. Therefore the Court of Chancery properly dismissed the complaint before it. However, Plaintiffs should have been permitted to amend their complaint to state a cognizable cause of action.
