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Chancery Examines Framework of Fiduciary Disclosure Obligations in Soliciting Private Investments

Clark v. Davenport, C.A. No. 2017-0839-JTL (Del. Ch. July 18, 2019). 

This opinion decides a motion to dismiss fraud and related tort claims arising out of various investments against a former director and CEO and an employee of a controlling stockholder.

When the investments turned out to be worthless, the plaintiff investor brought suit for breach of fiduciary duties and common law fraud arising from information that the investor received before investing in a company controlled by a business colleague and friend. 

The Court began by contrasting the less common factual scenario presented of a corporate fiduciary selling shares directly to a stockholder in a private transaction, with the more common case when directors are requesting stockholder action.  While not argued by either party, the Court reasoned that private stock sale transactions between corporate fiduciaries and a stockholder may be governed by the “special facts doctrine,” which imposes a duty of disclosure on a director when she possesses special knowledge of future plans or secret resources and deliberately misleads an unknowing stockholder.  See In re Wayport, Inc. Litig., 76 A.3d 296 (Del. Ch. 2013).  The parties had argued, however, that the director disclosure requirements articulated in Malone v. Brincat were applicable.  The Malone disclosure requirements apply when directors speak outside the context of seeking stockholder action, and result in liability only when a fiduciary knowingly disseminates false information.  The Court reasoned that the “knowing misconduct” standard for liability set forth in Malone is a more stringent legal test than common law fraud, where a plaintiff may prevail by demonstrating the lesser mens rea of “reckless indifference.”  Accordingly, if a plaintiff cannot successfully plead a common law fraud claim, then the same facts cannot give rise to a Malone claim based on a breach of fiduciary duties.  Compared to a Malone claim, a claim under the “special facts doctrine” is a relatively easy claim to bring, because a private stock sale does not implicate the same policy concerns when directors publicly speak outside the context of stockholder action. 

Also of potential interest, a plaintiff’s fraud claim will only be dismissed as a result of a contractual “anti-reliance” clause if the language clearly articulates a plaintiff’s agreement that he did not rely upon statements outside the contract’s four-corners.  Basic integration clauses or murky anti-reliance provisions will not bar a plaintiff from later asserting a fraud claim.  Here, the Court reasoned inter alia that a contractual integration clause did not bar fraud claims.  The opinion otherwise discusses certain recurring pleading issues with common law fraud claims, including the particularity requirement, the extent to which statements of opinion are actionable, and what allegations suffice to impute one defendant’s fraud to other defendants.