Delaware Business Litigation Report

Court Of Chancery Explains What Is A Duty Of Loyalty Claim

In re Alloy Inc. Shareholder Litigation, C.A. 5626-VCP (October 13, 2011)

Delaware corporate law permits a Delaware corporation to exonerate directors from claims that they acted negligently.  Those claims are known as "duty of care" claims.  However, the same statute also states that claims for acting in bad faith [known as "duty of loyalty" claims] may not be so easily precluded.  Hence, plaintiffs often seek to cast their complaints as duty of loyalty claims. Often, this takes the form of alleging that no loyal director could have been so stupid as to do what those directors are alleged to have done and so they must have been disloyal, not just negligent.

Well as this decision shows, it is just not that easy to plead a duty of loyalty claim.  You need really strong facts, not just conclusions.  This decision is a good example of how the Court analyzes those sorts of allegations and will dismiss a complaint that lacks the facts to sustain a duty of loyalty claim.

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