Gross Negligence Defeats DGCL § 144 Safe Harbor, Court Holds
The Delaware Court of Chancery held that even with disinterested-director approval, a board's "reckless indifference" during a sale process can neutralize statutory protection for conflicted transactions.
In its first significant interpretation of recent amendments to Section 144 of the Delaware General Corporation Law, the Delaware Court of Chancery held that statutory safe harbors for conflicted transactions can be defeated by a grossly negligent process. In 'Dodiya v. Franklin', the court found it was reasonably conceivable that a board acted with gross negligence when it restored a conflicted CEO’s access to sale-process information after he had leaked confidential data to the buyer. This "reckless indifference" neutralized the protection of the disinterested-director-approval safe harbor. The court also invalidated the stockholder-vote safe harbor because the proxy was materially misleading. Corporate counsel should recognize that this ruling elevates process over technical compliance; a board's procedural integrity is critical to securing the protection of the business judgment rule. Although an exculpation clause shielded the disinterested directors from personal monetary liability for the alleged breach of the duty of care, the transaction itself now faces review under the more stringent entire-fairness standard, placing the deal at risk.