Delaware Business Litigation Report

Chancery Dismisses Claims Seeking to Compel a Dividend Declaration and for Breach of the Duty of Care

Buckley Family Trust v. McCleary, C.A. No. 2018-0903-AGB (Del. Ch. Mar. 31, 2020).

This case involved a minority stockholder in a Subchapter S corporation seeking relief as a result of its dissatisfaction with management’s operating performance and the company’s unwillingness to pay dividends, matters which defendants contended were well within the exercise of their business judgment. The Court of Chancery granted defendants’ motion to dismiss the complaint.

Plaintiff, Buckley Family Trust (“Plaintiff”), a minority stockholder of McCleary, Inc. (the “Company”), asserted claims directly and derivatively on behalf of the Company against the Company’s Board of Directors (the “Defendants”): first, that Defendants had committed “an oppressive abuse of discretion” by failing to declare a dividend,” and, second, that Defendants breached their duty of care with respect to several questionable decisions that harmed the Company. Defendants moved to dismiss both claims under Rule 12(b)(6) for failure to state a claim and the second claim pursuant to Rule 23.1, on the grounds that Plaintiff had failed to make a pre-suit litigation demand on the Board or demonstrate that demand was futile. 

In dismissing Plaintiff’s first claim, the Court noted that, while the Court has the power to compel the payment of a dividend, it will only do so “on the theory of an oppressive or fraudulent abuse of discretion.” In this case, however, Plaintiff had not asserted any allegation that the directors, who were themselves substantial stockholders and received only modest compensation for their director roles, had a disabling conflict of interest in determining not to pay dividends. Nor did Plaintiff allege facts that would support a cognizable theory of coercion given that the board had authorized a special dividend in the past and dividends as necessary to cover stockholder tax obligations generated by company profits. Accordingly, the Court deferred to the Board’s business judgment not to declare and pay dividends and dismissed Plaintiff’s first claim. 

In dismissing Plaintiff’s derivative claim for mismanagement arising out of an alleged breach of the duty of care, the Court noted that “the decision to bring or refrain from bringing a derivative claim on behalf of the corporation is the responsibility of the board in the first instance” and that under both the Aronson and Rales standards, Plaintiff had to demonstrate that there was reason to doubt the impartiality of a majority of the directors to decide whether the Company should pursue litigation. Unlike most Delaware corporations, the Company did not have an exculpatory provision adopted pursuant to Section 102(b)(7) of the Delaware General Corporation Law exculpating directors against liability for monetary damages for breaches of the duty of care. Thus, in this case, the inquiry boiled down to whether a majority of the directors were interested because they were exposed to a substantial likelihood of liability for a breach of the duty of care claim. Noting that the “standard of care applicable to the fiduciary duty of care of a director or officer is gross negligence,” the Court found that nothing in Plaintiff’s complaint nor in the documents incorporated therein demonstrated with the requisite particularity that the Board’s actions or inactions were “recklessly indifferent or without the bounds of reason such that the directors would face a substantial likelihood of liability.” Thus, the Court dismissed Plaintiff’s second claim on the grounds that Plaintiff had not made a demand on the Board and was unable to demonstrate that demand was futile. 

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