Delaware Business Litigation Report

Chancery Dismisses Derivative Breach of Contract Claim Against Directors for Alleged Violations of Certificate of Incorporation

Lacey v. Mota-Velasco, C.A. No. 2019-0312-SG (Del. Ch. Feb. 11, 2021)

A corporate charter represents a contractual agreement between the corporation and its stockholders. In Lacey, the Court of Chancery addressed whether a breach of contract claim for damages based on an alleged violation of a provision in the certificate of incorporation could be brought derivatively against director defendants.

The plaintiff brought a derivative claim for breach of contract against the directors of Southern Copper Corporation (“Southern Copper”) for allegedly violating an article of the charter requiring the approval of an independent committee of any transactions between Southern Copper and its controllers. In this third of three decisions resolving separate aspects of the defendants’ motions to dismiss, the Court dismissed the charter-based breach of contract claim. The Court reasoned that a corporate charter does not bind a corporation and its directors as counterparties. Instead, directors must comply with the charter by virtue of their fiduciary duties, not because of any contractual obligation. The Court noted that a contrary holding would subject directors to strict liability for violations of a corporate charter, a result at odds with core principles of Delaware law, such as those animating 8 Del. C. § 102(b)(7).

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