Directors of public companies receive generous compensation for relatively little work, with average awards of cash and stock worth more than $300,000 per year.[1] Boards and companies justify these awards, in part, by pointing to the onerous duties and obligations of these directors.[2] But these duties and obligations are tempered because many, if not most, public companies also relieve their directors of personal monetary liability for breaches of fiduciary duty that arise from mere negligence. The existence of an exculpation clause—a legal shield that protects directors from personal liability for mere carelessness—overwhelmingly leads to dismissal of lawsuits brought in Delaware and other states against independent directors when a stockholder does not specifically allege that such directors had a conflict of interest or intended to breach their fiduciary duties.[3] To survive, such claims require allegations that the actions resulted from the independent directors intending to do harm, intended to derelict their duties, or consciously disregarded their known duties.[4] In other words, that the director breached their duties in bad faith.

            Stockholder lawsuits for breach of fiduciary duties often allege that a proxy statement or other disclosure document contained materially misleading misstatements. In many of these cases, however, particularly in cases involving a conflicted stockholder and a special committee, Defendants seek dismissal of claims against independent directors as exculpated. Because proxy statements typically fail to disclose the acts of independent directors with respect to the proxy statement itself, complaints also fail to allege specific facts supporting non-exculpated claims against those directors. Sometimes this is warranted, for example where a CEO misled a board about merger discussions, and thus the board understandably had no idea that disclosures were misleading.[5] But when independent directors can be alleged to have known about, but failed to correct, the misleading statements or omissions, dismissal on exculpation grounds is unwarranted.[6]

            Such detailed allegations proved to be the difference when the Delaware Court of Chancery reinforced this principle in June of this year. In City of Sarasota Firefighters’ Pension Fund v. Inovalon Holdings Inc.,[7] Chancellor Kathaleen St. Jude McCormick sustained claims against independent directors where a proxy statement failed to disclose potential conflicts of interest faced by a special committee’s financial advisors, Evercore and J.P. Morgan, and made false disclosures regarding the market outreach by those same financial advisors. At first, the Court of Chancery dismissed the lawsuit under Kahn v. M&F Worldwide Corp.,[8] finding that the stockholder vote was fully informed.[9]

            The Delaware Supreme Court reversed this decision, finding that the proxy statement's failure to disclose Evercore's concurrent representations of two members of the acquiring consortium, J.P. Morgan's concurrent conflicts with the consortium members, and J.P. Morgan's receipt of $400 million in fees from those same members was material information, as was the Proxy Statement’s overstatement of Evercore’s involvement in counterparty outreach.[10]

            In contesting the plaintiff’s renewed claims, the special committee members argued that it was not reasonably conceivable that withholding this material information reflected bad faith and thus the special committee members were exculpated.[11] But the Court of Chancery, in finding that the plaintiff plead non-exculpated claims, found that the proxy statement and complaint supported an inference that the special committee defendants intentionally withheld material information they had knowledge of, implicating bad faith.[12] And unlike in cases relied upon by the special committee defendants, other disclosures made in the proxy did not counteract such an inference of bad faith.[13]

            This holding makes clear that, while Delaware law on the exculpation of independent directors represents a high bar, it is not insurmountable. Stockholders and attorneys seeking to hold independent directors accountable for their actions in approving a misleading proxy need to plead not only the materiality of the misstatement or omission, but also:

1. That each director knew of the information withheld.
2. That the director knew such information would weigh against stockholder approval.
3. That the disclosure document did not include other countervailing disclosures about the subject of nondisclosure that would inhibit an inference of bad faith.

            This requires not only the dedication of resources to uncover the truths hidden from the public, but careful attention to the facts that would contradict an inference of bad faith. For example, in a case cited by the defendants in Inovalon, the proxy did not disclose the board’s view of the company’s intrinsic value, a material piece of information, but did disclose that other factors took precedence over the intrinsic value, and that the board initially approved a negotiation range that included their view of the intrinsic value.[14] These disclosures, indicating to stockholders that the board believed the deal price was below the company’s intrinsic value, altered the total mix of information in such a way that contradicted any inference of bad faith.[15] Therefore, a complaint needs not only detailed and specific allegations of omission, but must also explain how the other disclosures made by defendants fail to contradict an inference of bad faith.

[1] Lawrence A. Cunningham & Carlos Juarez, Trends in Director Compensation, Harvard Law School Forum on Corporate Governance (Jan. 26, 2024) available at https://corpgov.law.harvard.edu/2024/01/26/trends-in-director-compensation/.

[2] Id.

[3] In re Cornerstone Therapeutics Inc., Stockholder Litig., 115 A.3d 1173 (2015).

[4] McElrath v. Kalanick, 224 A.3d 982, 991 (Del. 2020) (quoting In re Walt Disney Co. Deriv. Litig., 906 A.2d 27, 64, 66 (Del. 2006)) (internal quotation marks omitted).

[5] See, e.g., In re Mindbody, Inc. S’holder Litig., 2020 WL 5870084 (Del. Ch. Oct. 2, 2020) (dismissing claims against independent directors where the CEO and CFO allegedly manipulated the sales process by withholding and manipulating the information available to the board of directors).

[6] Chen v. Howard-Anderson, 87 A.3d 648, 691-92 (Del. Ch. 2014) (denying summary judgment where evidence supported a finding that directors knew of misleading omission and had opportunity to review the omitting proxy statement).

[7] 2025 WL 1642064 (Del. Ch. June 10, 2025).

[8] 88 A.3d 635 (Del. 2014).

[9] City of Sarasota Firefighters’ Pension Fund v. Inovalon Holdings, Inc., 2025 WL 1642064, at *1 (Del. Ch. June 10, 2025).

[10] City of Sarasota Firefighters’ Pension Fund v. Inovalon Holdings, Inc., 319 A.3d 271, 292-304 (Del. 2024).

[11] Inovalon, 2025 WL 1642064 at *2.

[12] Id. at 4-5.

[13] Id. at 4.

[14] In re USG Corporation S’holder Litig., 2020 WL 5126671, at *27-28 (Del. Ch. Aug. 31, 2020).

[15] Id.