Journal of Business & Technology Law
| Case | Sutherland v. Sutherland |
| Court, State | Court of Chancery, Delaware |
| Date of Decision, Type of Case | 3/23/2009, Derivative suit |
| Case Number | C.A. No. 2399-VCL |
| Citation | Sutherland v. Sutherland, No. 2399-VCL, 2009 WL 750287 (Del. Ch. Mar. 23, 2009). |
| Facts Of Case | Sutherland Lumber-Southwest, Inc. ("Southwest") is a closely held family corporation and is a wholly owned subsidiary of Dardanelle. The plaintiff, Martha Sutherland, is a 25% stockholder of Dardanelle and the defendants are: Perry Sutherland, Martha’s brother, a 25% stockholder of Dardanelle, and owner of all the voting preferred stock of Dardanelle; Todd Sutherland, Martha and Perry’s brother, a 25% stockholder of Dardanelle, and a director of both Dardanelle and Southwest; and Mark Sutherland, the cousin of the Sutherland siblings and a director of Dardanelle and Southwest. Plaintiff's complaint alleges (1) derivative claims on behalf of Dardanelle for breach of fiduciary duty, (2) waste, and (3) double derivative claims on behalf of Southwest for breach of fiduciary duty. In particular, plaintiff alleged that the defendants used the companies' funds and assets for personal benefit and that the defendants approved their own employment agreements, which included excessive compensation. Defendant's filed a motion to dismiss Plaintiff's compliant for failure to state a claim upon which relief can be granted. In support of this motion, the defendants relied on the statute of limitations and an exculpatory provision in both corporations' charters, providing that "[a]ny director ... may be a party to or may be peculiarly or otherwise interested in any contract or transaction of the corporation, provided that the fact that he ... is so interested shall be disclosed or shall have been known to the board of directors, or a majority thereof; and any director of the corporation, who is ... so interested, may be counted in determining the existence of a quorum ... and may vote thereat ... as if he were not ... so interested." |
| Holding | A charter provision, the effect of which would effectively eradicate the duty of loyalty for corporate directors, is not enforceable under Delaware law. |
| Court Reasoning | The Court rejected defendants' argument that the exculpatory charter provision sterilized director interest in approving self-dealing transactions. The court found that such an interpretation was contrary to established Delaware law. The Court reasoned that accepting the defendants' interpretation of the provision would immunize all interested transactions and eradicate the duty of loyalty. Thus, the Court concluded that the exculpatory provision could not form the basis for a dismissal. Moreover, the Court followed Sterling v. Mayflower Hotel Corp., 93 A.2d 107 (Del. 1952) to conclude that the exculpatory provision allows a director removes a director’s disability to participate in a quorum to vote on an interested transaction, but does not sanitize disloyal transactions. However, because of the three-year statute of limitations applicable in this case, the Court only denied the motion to dismiss with respect to plaintiff's timely claims. The Court explained that although the provision is permissible under the Delaware Limited Liability Company Act and the Delaware Revised Uniform Limited Partnership Act, where freedom of contract is the guiding and overriding principle, it is expressly forbidden by the Delaware General Corporation Law Section 102(b)(7) which provides that a corporate charter may contain a provision eliminating or limiting personal liability of a director for money damages in a suit for breach of fiduciary duty, so long as such provision does not affect director liability for "any breach of the director's duty of loyalty to the corporation or its stockholders." |
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