Delaware Business Litigation Report

Chancery Finds Breach of Fiduciary Duty Where Defendant Resorted to Extra-Contractual Self-Help

Macrophage Therapeutics, Inc. v. Goldberg, C.A. No. 2019-0137-JRS (Del. Ch. Jun. 23, 2021) (Post-trial Memorandum Opinion)
Macrophage Therapeutics, Inc. v. Goldberg, C.A. No. 2019-0137-JRS (Del. Ch. Jun. 23, 2021) (Letter Opinion)
Delaware law provides several remedies for a party who believes that a contractual breach has occurred. But extra-contractual self-help is usually not one. As this case demonstrates, the choice to seek direct retribution, rather than legal recourse, may constitute a breach of a director’s duty of loyalty. A related decision also considered and rejected the argument that formal board authorization was needed for a corporation to commence litigation. 

In 2018, Defendant Goldberg surrendered his preferred shares in Plaintiff Macrophage Therapeutics, Inc.’s (“Macrophage”) parent in exchange for a 5% stake in, and voting control of, Macrophage. This occurred as part of a plan to create independence between Macrophage and its parent to make Macrophage more attractive to investors. Along the way, the effort to create separation between Macrophage and its parent stalled. Instead of seeking to enforce the parties’ agreements, Goldberg formed a new entity (Defendant M1M2 Therapeutics, Inc.), transferred Macrophage’s primary asset to M1M2, granted himself a 5% stake in M1M2, and gave himself voting control of M1M2. Macrophage alleged that Goldberg’s actions (the “Challenged Transactions”), among other things, breached fiduciary duties.

In its post-trial opinion, the Court of Chancery agreed that Goldberg breached his fiduciary duties to Macrophage. Because Goldberg stood on both sides of the Challenged Transactions, the Court applied an “entire fairness” standard of review, meaning it was Goldberg’s burden to prove that the Challenged Transactions resulted from fair dealing and fair price. Goldberg proved neither. As for fair dealing, Goldberg took unilateral action without alerting the other members of Macrophage’s board of his transfer of the company’s primary asset. And as for fair price, the Court rejected Goldberg’s assertion that the Challenged Transactions merely replicated the parties’ agreements. Goldberg transferred Macrophage’s primary asset to an entity controlled by Goldberg, with no consideration from Goldberg or to Macrophage. Regardless of whether Macrophage’s parent failed to live up to its agreement, that agreement did not contemplate the Challenged Transactions. As the Court summarized, “Dr. Goldberg attempted to take for himself that which belonged to Macrophage. In doing so, he breached his duty of loyalty to Macrophage stockholders.” Despite Goldberg’s breach, however, the Court declined to award anything other than nominal damages of one dollar because Macrophage unwound the Challenged Transactions quickly and because, although wrong, Goldberg’s actions were not so egregious as to permit recovery of attorneys’ fees for a loyalty breach or pursuant to the bad faith exception to the American Rule.

In a separate decision, the Court also denied Goldberg’s belated motion to dismiss filed weeks after the trial. Goldberg claimed that Macrophage lacked standing to pursue its claim against him because Macrophage’s board failed to authorize the filing of the action. The Court held that nothing in the Macrophage charter required Board authorization to initiate the action, and under bylaws granting the CEO authority to engage in the “general and active management of the business of the corporation,” the CEO’s authorization sufficed. The Court also found that the other two board members, the only disinterested directors, had met and concluded the litigation should be brought. The Court rejected Goldberg’s contention that a written board resolution was required. Accordingly, the Court denied Goldberg’s post-trial motion to dismiss.

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