On behalf of Ball & Bonholtzer on Wednesday, September 3, 2014.
On Aug. 7, Vice Chancellor Sam Glasscock III issued a letter opinion in the matter Buttonwood Tree Value Partners LP v. R.L. Polk & Co., C.A. No. 9250-VCL, that is not attention-grabbing because it wrestles with some nuanced topic de jure of Delaware corporate law, but rather because it deals nearly entirely with the rather pedestrian, but not often explicated, principle that a Delaware corporation does not independently owe its stockholders fiduciary duties. Rather, fiduciary duties are owed to the stockholders (and the company) by the directors and officers who are the actual actors on behalf of the company.
In Buttonwood, the plaintiffs sued both the members of the board of directors of R.L. Polk & Co. Inc. as well as the company itself, claiming that the defendants, in breach of their fiduciary duties, had induced plaintiffs to sell shares of stock for an inadequate price in a corporate self-tender. In count II of their complaint, the plaintiffs alleged that the corporation "failed to meet its disclosure obligations under Delaware law; aided and abetted the individual defendants' breaches of fiduciary duties; and [was] an indispensable party to the litigation." The corporation moved to dismiss count II—a motion the court granted.
The court found the disclosure claims against the corporation were pleaded as claims that the company breached a fiduciary duty of disclosure to its stockholders, and that those claims failed because under settled Delaware law, "fiduciary duties are owed by the director and officers to the corporation and its stockholders." In other words, a corporation does not owe fiduciary duties to its stockholders.
The court cited to Arnold v. Society for Savings Bancorp, 678 A.2d 533 (Del. 1996); In re Dataproducts Shareholders Litigation, 1991 Del. Ch. LEXIS 149 (Del Ch. Aug. 22, 1991); and In re Wayport Litigation, 76 A.3d 296 (Del Ch. 2013), as authority for this holding. Even the cases cited by the vice chancellor treat the principle as well-settled and merely recite the rule with little historical or background analysis. (See Wayport:"Wayport is not liable for breach of fiduciary duty. As a corporate entity, Wayport did not owe fiduciary duties to its stockholders"; and Dataproducts: "The claims stated against Dataproducts are clearly for breach of fiduciary duty. However, the plaintiffs concede that a corporation qua corporate entity is not a fiduciary of, and thus cannot owe a fiduciary duty to, its shareholders.") It is interesting to note that Vice Chancellor J. Travis Laster also recently recognized this principle of law in a February opinion in In re Orchard Enterprises Stockholder Litigation, 88 A.3d 1, 54 (Del. Ch. 2014), in which he said, "The fiduciaries who serve the entity owe fiduciary duties; the entity that is served does not."
In Buttonwood, Glasscock also held, for similar reasons, that a "corporation cannot aid and abet violations by the fiduciaries who serve it." This same holding can also be found in Wayport and Orchard.
Buttonwood, Wayport and Orchard represent a trio of opinions that have been issued in just over a year on this topic, which raises the question of why these fiduciary duty and aiding and abetting claims are being asserted against corporate entities by plaintiffs. A couple of reasons are alluded to in the Buttonwood opinion. One reason might be for purposes of damages or remedies. The plaintiffs in Buttonwood claimed the corporation was an indispensable party for purposes of awarding rescissory damages, but that claim was rejected by the court. Another reason might be in an effort to prevent removal to federal court on diversity grounds by placing citizens of the same state on both sides of the litigation. The opinion in Buttonwood notes the plaintiffs also argued that the company was an indispensable party because "without Polk, this matter is subject to removal to federal court."
Beyond the scope of this article are the broader issues that surround modern jurisprudence on the corporation as a juridical entity. As alluded to in the title of this piece, the 2010 opinion of the U.S. Supreme Court in Citizens United v. Federal Election Commission, 558 U.S. 310, might be read as essentially holding that a corporation is a "person" with protected rights under the First Amendment of the U.S. Constitution. What impact, if any, does that ruling have on the underpinnings of the Delaware corporate law principles discussed in Buttonwood? Readers, debate among yourselves: Is a corporation essentially a person that has the power to act in its own right, or is it simply an entity that can only act through its officers and directors?