February 26, 2014
Edward M. McNally
Delaware Business Court Insider

Is it becoming easier for defendants to win summary judgment in corporate litigation? A recent Delaware Court of Chancery decision granting summary judgment to the defendants in a fiduciary duty case appears to resolve disputed facts in defendants' favor. Yet, it is settled law that a court may not resolve disputes of material fact without a trial. Has Delaware law changed when summary judgment is appropriate?

First, some background to this recent decision in In re Answers Shareholders Litigation, Del. Ch. C.A. 6170-VCN (February 3, 2014), is necessary. Answers involved allegations that the directors of Answers Corp. had violated their fiduciary duties of care and loyalty and acted in bad faith by hastily approving a merger that the Answers CEO favored to avoid being fired by its controlling stockholder, a venture capital firm displeased with Answers' management's performance. The Chancery Court previously had dismissed the duty of care claim because Answers had exculpated the directors from such a claim by provisions in the Answers charter.

After discovery, the defendants moved for summary judgment in their favor. The plaintiffs contended that the record showed several factual disputes that precluded a summary judgment. For example, they argued that there was evidence that the CEO did fear for his job, that the directors were told the merger offer was "low," that Answers was improving financially but still accepted the merger offer and that the CEO nonetheless pushed the directors into accepting the merger offer to avoid being fired. While noting the plaintiffs' claims, the court still granted the defendants a judgment before a trial that would have weighed the allegedly conflicting evidence. Why did it grant summary judgment under those circumstances?

One key to understanding the Answers decision is to understand the difference between a motion to dismiss and a motion for summary judgment after discovery is taken. In considering a motion to dismiss that is filed before the plaintiff has been able to fully investigate the facts, a court will make any reasonable inference that the factual allegations of the complaint logically warrant. Indeed, in Answers, the Chancery Court had denied a motion to dismiss the duty of loyalty and bad-faith claims because it was required to make inferences of bad faith based on the complaint's factual allegations.

However, the standards are different when the court is considering a motion for summary judgment after the facts have been investigated by the plaintiff. When, as in Answers, the party moving for summary judgment provides evidence that supports granting its motion, the opposing party is no longer entitled to rely on inferences from the evidence to show that the material facts are disputed. Instead, the non-moving party must show hard facts that raise a genuine dispute that a judgment in its favor may result after a trial.

Moreover, the alleged factual dispute must be over something that is material to the outcome of the case. A factual dispute over a minor matter is not sufficient to deny a motion for summary judgment and require an expensive trial. That distinction between what is material and what is not largely explains the result in Answers.

Defining what facts are material starts with an understanding of the substantive law involved in the case. Put another way, understanding what is relevant to a proper analysis is the key to defining materiality. Answers illustrates this point in two important ways.

First, in considering a duty of loyalty claim such as that asserted in Answers, the court logically looks to see if there is any reason to believe that otherwise disinterested, independent directors approved a transaction for an improper reason. Under Delaware law, disinterested directors' bad faith is never presumed and a plaintiff has to prove the improper motive he or she alleges influenced the directors. Furthermore, a duty of loyalty claim is not proved by showing the directors made a mistake of judgment. Mistakes of judgment involve a duty of care claim, not a duty of loyalty claim. In Answers, the plaintiffs made much of what they contended was a bad decision to sell Answers on the cheap. But all that might prove is that the directors made a bad decision, not that they were disloyal. Hence, the Answers plaintiffs failed to show a material dispute over the independent directors' motivations. Therefore, they lost the summary judgment motion on that issue.

Second, the Answers plaintiffs alleged that the directors made their decision to hastily approve the merger because they wanted to save the job of the Answers CEO. The problem with that argument is that the plaintiffs were unable to show any facts to support the claim the CEO really did fear to lose his job or, more importantly, that the independent directors even were aware of or considered the CEO's job was in jeopardy. Thus, there was no genuine dispute of fact over whether the CEO's plight had influenced the directors' decision.

Finally, to some extent, the Answers decision does seem to resolve factual disputes without a trial. For example, it does resolve a dispute over whether the Answers board was well motivated to accept the buyout proposal. But as the court's carefully-thought-out opinion points out, there was overwhelming evidence the Answers board acted properly to get the best deal it could for the Answers stockholders. At some point (and Answers certainly qualifies), a trial court should conclude the evidence is so overwhelmingly in favor of one side of the case that a trial would be a waste of precious judicial resources and it is fair to resolve the case by a summary judgment. Frankly, that is a good result for both sides. It saves both parties from the expense of a useless trial.