Delaware Court Denies Safe Harbor in First Test of New DGCL 144
The Court of Chancery held for the first time that a board's "grossly negligent" process in managing a conflicted director can defeat the DGCL Section 144(a)(1) safe harbor, even with a disinterested majority vote.
In its first interpretation of amended Delaware General Corporation Law Section 144, the Court of Chancery in 'Dodiya v. Franklin' denied a motion to dismiss, holding that safe-harbor protection for a conflicted transaction was unavailable at the pleading stage. The court found it "reasonably conceivable" that the target's board acted with gross negligence by restoring a conflicted director's access to confidential sale-process information, despite knowing he had previously leaked material nonpublic data to his father, the ultimate acquirer. This decision establishes that the Section 144(a)(1) safe harbor requires not just a disinterested majority vote, but a process conducted "in good faith and without gross negligence." For corporate counsel and dealmakers, this ruling underscores that process controls are critical; merely walling off a conflicted director on paper is insufficient if not enforced. The court also found the stockholder-vote safe harbor under Section 144(a)(2) was unavailable because the proxy statement allegedly misrepresented the conflicted director's exclusion from the process. While the company's charter exculpated disinterested directors from damages for this duty-of-care breach, the decision exposes the underlying transaction and the conflicted directors to entire fairness review.