February, 1999

Delaware Directors Owe Fiduciary Duties to Shareholders in Connection With Corporate Disclosures

Directors of Delaware corporations have traditionally owed shareholders a fiduciary duty to disclose all material information when they request action on a matter submitted to the corporation's shareholders. The Delaware Supreme Court, in Malone v. Brincat, (Del. 1998), has now held that directors who knowingly disseminate false information resulting in corporate injury or damage to individual shareholders can be liable for a breach of fiduciary duty, even if the information was disclosed without a request for shareholder action.

In Malone the plaintiffs were shareholders of Mercury Finance Company, a publicly traded company engaging primarily in purchasing installment sales contracts from automobile dealers and providing short term installment loans directly to consumers. The shareholders alleged that the Mercury directors caused Mercury to overstate Mercury's earnings, financial performance and shareholder equity in Securities and Exchange Commission filings and communications to shareholders, and that the corporation lost all of its value as a result of the false disclosures. The lower court dismissed the complaint, holding that no cause of action arose, since no shareholder action was requested in connection with the release of the information.

The Supreme Court of Delaware, upheld the lower court's dismissal of the complaint, but disagreed with the lower court's reasoning. The court found that "[w]hen directors disseminate information to stockholders when no stockholder action is sought, the fiduciary duties of care, loyalty and good faith apply. Dissemination of false information could violate one or more of those duties." The court noted that the plaintiffs did not allege a derivative claim on behalf of the corporation or any individual injury to any plaintiff. However, since the "complaint alleges (if true) an egregious violation of fiduciary duty by the directors," the court permitted the plaintiffs to amend the complaint to state a cause of action.