Chancery Explains § 144 Safe Harbor Failure in Buyout Case
In a case of first impression, the Court of Chancery found gross negligence and a misleading proxy defeated DGCL § 144 protections, but common law exculpation still shielded most directors from liability.
In its first opinion analyzing DGCL Section 144 safe harbors in a merger challenge, 'Dodiya v. Franklin', the Delaware Court of Chancery denied a motion to dismiss claims that the provisions protected a conflicted buyout of Whole Earth Brands. The acquirer was a major stockholder whose son was the company's interim CEO and allegedly leaked confidential valuation data to his father's entity.
The decision clarifies that the safe harbor for disinterested director approval can be lost if a board acts with gross negligence, which the court found conceivable where directors restored the son's access to sensitive data despite his previous leak and refusal to sign an NDA. It also confirms the stockholder-vote safe harbor is unavailable if the proxy contains material misstatements. Critically, however, the court reinforced the power of charter exculpation clauses, dismissing claims against most directors by finding their flawed conduct constituted an exculpated breach of care, not bad faith. Claims survived only against the two fiduciaries with direct financial conflicts. Counsel advising on conflicted deals must ensure robust information controls and scrupulously accurate disclosures, as failures can negate § 144 protections.