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Court of Chancery Dismisses Complaint Based On Conjecture

Posted In Fiduciary Duty

Pfeffer v. Redstone, C.A. No. 2317-VCL (February 1, 2008).

At first this seems like a common disclosure case. It is more than that, however. The court here shows that it expects claims to be based on more than mere conjecture to survive a motion to dismiss. The Complaint alleged that the key corporate officers knew of a bad cash flow analysis but failed to disclose it in connection with an exchange offer. When the plaintiff''s counsel could not even say he had seen the alleged report or explain how it was disclosed to the defendant directors, the complaint was dismissed.

To support allegations of knowledge of a red flag, the allegation must be based on common sense or specific facts. It is common sense to infer the directors saw a report if it was common knowledge in the corporation and is a type of report that one would expect the board to have seen. It is not common sense to believe that an obscure memo generated by a lower level employee was shown to the board of a publicly traded corporation.

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