Delaware decisional law on entire fairness review of controlling shareholder transactions has been complicated in part by the subtle distinction between facially disinterested directors (who are liable only where a specific, non-exculpated breach of fiduciary duty is shown) versus interested or controlled directors whose actions are subject to entire fairness review, and who essentially are "strictly" liable if entire fairness is found to be absent. A recent decision by the Court of Chancery clarifies the pleading standard applicable to claims against disinterested directors who negotiated and approved a controlling shareholder transaction subject to entire fairness review, and moreover makes clear that such claims are not subject to dismissal under a Section 102(b)(7) exculpatory charter provision insulating directors from personal liability for money damages caused by a breach of the duty of care.

Vice Chancellor Glasscock's decision in In re Cornerstone Therapeutics Inc. Stockholder Litig., disposed of Rule 12(b)(6) motions to dismiss filed on behalf of Cornerstone Therapeutics Inc. and the purportedly independent directors comprising a special committee and who otherwise ultimately approved and recommended a transaction whereby Cornerstone's controlling stockholder acquired the minority-owned shares. The moving defendants conceded that entire fairness applied at the pleading stage; the independent directors (whose independence was challenged in the action) sought dismissal based on (1) plaintiffs' failure adequately to allege specific breaches of fiduciary duty and (2) exculpation under a Section 102(b)(7) provision in Cornerstone's charter. With respect to both contentions, the question framed by the court was: "[M]ust specific facts raising an inference of a non-exculpated breach be pled with respect to each director defendant, or is it enough at the motion-to-dismiss stage to have pled that a disinterested director facilitated a transaction with a controller that was not entirely fair, upon which pleading the actions of the director, as regards her personal liability, must receive judicial scrutiny upon a fully developed factual record?"

After providing a remarkably helpful overview of emerging law on entire fairness review, and noting that there are compelling policy considerations supporting both plaintiffs' and defendants' antithetical positions on the issue, the court concluded that it was constrained by controlling precedent to deny the motions under the particular circumstances of the case before it (i.e., an acquisition by a controlling shareholder negotiated and recommended by a special committee but not at the outset conditioned on a non-waivable majority of the minority stockholder vote). In particular, the court held that the plaintiffs "have made a sufficient pleading that a stockholder controlled the corporate machinery; that it used that machinery to facilitate a transaction of which it thus stood on both sides; that the transaction was not entirely fair to the minority; and that the [independent directors] negotiated or facilitated the unfair transaction. Such a pleading is sufficient . . . to withstand a motion to dismiss on behalf of the [independent directors]." Accordingly, as to the Section 102(b)(7) exculpatory provision, the court held that once "the question of entire fairness is resolved after trial, and if I find the transaction not entirely fair, then the issue of whether the [independent directors] breached a non-exculpated duty may be addressed."

Cornerstone makes clear that the election to proceed with a controlling stockholder transaction not conditioned at the outset on both (a) approval by an empowered and properly functioning committee of independent and disinterested directors and (b) a fully informed majority of the minority stockholder vote (thereby bringing the transaction within the scope of the business judgment rule) may have potentially expensive procedural ramifications: Claims against facially independent directors negotiating and approving such transactions need only establish at the pleading stage the applicability of entire fairness scrutiny; litigation costs as to the independent directors in this transactional paradigm cannot be curtailed by a Rule 12(b)(6) motion to dismiss based on Section 102(b)(7) exculpation. Rather, the independent directors who approved the deal will need to defend the litigation through disposition on the merits. Compounding the exposure, stockholder plaintiffs thereby will have an opportunity to explore through discovery independent bases for liability or facts that will enable them to more meaningfully challenge the directors' disinterestedness or independence.