In re Cornerstone Therapeutics: Pleading Requirements under the Entire Fairness Standard
In In re Cornerstone Therapeutics Inc., Stockholder Litig., Consol. Civil Action No. 8922-VCG, 2014 BL 250168 (Del. Ch. Sept. 10, 2014), Cornerstone Therapeutics Inc.’s (“Cornerstone”) minority stockholders (“Plaintiffs”) filed an amended complaint asserting, in relevant part, (i) a breach of fiduciary duty against seven of the nine directors of Cornerstone’s board of directors (“Defendants”) and (ii) breach of fiduciary duty against Chiesi Farmaceutici S.P.A. (the “Controlling Stockholder”). Defendants then moved to dismiss claims against the five directors who negotiated the merger agreement in which the Controlling Stockholder acquired Cornerstone.
The Controlling Stockholder presented Cornerstone’s board with an offer letter to acquire the remaining common stock at $6.40 to $6.70 per share, or a premium of 20% to 25%. The Defendants formed a special committee consisting of disinterested directors to negotiate the offer. The special committee rejected the initial offer by the Controlling Stockholder and eventually agreed on $9.50 per share. Plaintiffs alleged the Controlling Stockholder used its control to facilitate the merger from both sides of the negotiation.
The court acknowledged that the controlling shareholder had the burden of establishing entire fairness. Under entire fairness review, a merger must be examined through “a developed factual record with respect to the controller and the directors affiliated with the controller.” Defendants, however, sought dismissal of the disinterested directors. The court, therefore, had to determine the pleading standard for these directors.
Plaintiffs asserted that it was enough to allege that the directors “facilitated a transaction with a controlling shareholder that was not entirely fair.” Defendants, however, contended that Plaintiffs had to allege “particularized pleadings are required that, if true, raise an inference that such director breached a non-exculpated duty.”
The court found that where the entire fairness standard of review applies “negotiating and facilitating directors must await a developed record, post-trial, before their liability is determined.” With no factual record on which to base a sufficient allegation, the court held Plaintiffs were not required to meet the pleading standard for a disinterested director’s alleged breach of the duty of loyalty at the pre-trial stage of the proceedings. The court acknowledged that accepting the Plaintiff’s argument would result in a trade-off between “justice being done in cases where…faithless directors would not be called to account,” and creating an incentive for boards to reject negotiations with controllers to the detriment of the minority stockholders. The court, however, held that it was “not fee to make a policy determination” due to controlling precedent by the Delaware Supreme Court. Accordingly, the Delaware Chancery Court denied Defendant’s motion to dismiss the claims against the five disinterested directors.
The primary materials for this case can be found on the DU Corporate Governance website.