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Introduction to the Law of Corporations: Cases and Materials

In Re Cornerstone Therapeutics, Inc.

Following Van Gorkom, Delaware adopted its exculpation statute: §102(b)(7).  The effect of §102(b)(7) provisions on litigation is significant. Exculpation provisions eliminate the monetary liability of directors for violations of their duty of care. Consequently, if a plaintiffs alleges only that directors violated their duty of care and that caused them some damage, there is no remedy available at law for these plaintiffs. In Malpiede v Townson, the Delaware courts encountered such a situation. In Malpiede, stockholders alleged that directors violated their duty of care to the corporation resulting in an injury to the corporation and its stockholders that could only be remedied with cash damages. The Malpiede court considered the effect of an exculpation provision in the corporate charter on the litigation and held that where the plaintiff pleads only a violation of the duty of care, and where the plaintiff is seeking only cash damages, and, finally, where the corporation has a §102(b)(7) provision in its certificate of incorporation, that the court will be unable to provide a remedy. Consequently, judicial economy requires that such a case be dismissed upon a 12(b)(6) motion to dismiss and that the defendant need not file an answer to the complaint. 

In many cases, the entire board is not guilty of a violation of the duty of loyalty. Rather, only one or two directors may have been alleged to have engaged in bad acts. Nevertheless, plaintiffs will often sue the entire board of directors. The question then arises whether when a plaintiff challenges an interested transaction that is presumptively subject to entire fairness review, must the plaintiff plead a non-exculpated claim against the disinterested, independent directors to survive a motion to dismiss by those directors? Or must those directors remain in the suit. The Cornerstone opinion applies the principles of Malpiede provides some guidance on this question.

As you read the Cornerstone opinion consider the effect of the holding in Cornerstone on questions of demand futility and the Zuckerberg standard.