722 A.2d 5 (Del. 1998)
Doran Malone, Joseph P. Danielle, and Adrienne M. Danielle filed an individual and class action in the Court of Chancery on behalf of themselves and all persons who owned common stock of Mercury Finance Company from 1993 through the present.1 The named defendants were the directors of Mercury, specifically John N. Brincat, Dennis H. Chookaszian, William C. Croft, Clifford R. Johnson, Andrew McNally IV, Bruce I. McPhee, Fred G. Steingraber, and Phillip J. Wicklander, along with KPMG Peat Marwick LLP.2
The complaint alleged that the director defendants knowingly and intentionally caused Mercury to disseminate materially false information about the company's earnings and financial condition in SEC filings and communications to shareholders since 1994.3 Mercury's 1996 earnings were reported as $120.7 million but were actually only $56.7 million.4 Mercury's 1995 earnings were reported as $98.9 million but were actually $76.9 million.5 Mercury's 1994 earnings were reported as $86.5 million but were actually $83 million.6 Mercury's 1993 earnings were reported as $64.9 million but were actually $64.2 million.7 Shareholders' equity on December 31, 1996, was reported as $353 million but was actually $263 million or less.8 All of the inaccurate information appeared in virtually every SEC filing and communication from the directors to shareholders during the period.9
The complaint further alleged that as a direct result of the false disclosures the company lost all or virtually all of its value, approximately $2 billion.10 The suit sought damages on behalf of the named plaintiffs and the putative class.11 The director defendants moved to dismiss on the ground that they owed no fiduciary duty of disclosure under the circumstances alleged.12 KPMG moved to dismiss the aiding and abetting claim asserted against it.13
After briefing and oral argument, the Court of Chancery granted both motions to dismiss with prejudice pursuant to Chancery Rule 12(b)(6).14 The plaintiffs appealed to the Supreme Court of Delaware.15
Whether directors of a Delaware corporation owe a fiduciary duty to disclose accurate information to shareholders in the absence of a request for shareholder action?16
Directors who knowingly disseminate false information that results in corporate injury or damage to an individual stockholder violate their fiduciary duty, and may be held accountable in a manner appropriate to the circumstances.17
Yes. The complaint alleged that the director defendants knowingly and intentionally caused Mercury to disseminate materially false information about the company's earnings and financial condition in SEC filings and communications to shareholders since 1994. Specific overstatements included 1996 earnings reported as $120.7 million instead of the actual $56.7 million.18 This conduct implicates the directors' fiduciary duties of loyalty and good faith.19
Those duties require honesty whenever directors communicate publicly or directly with shareholders about corporate matters.20 The duty applies regardless of whether shareholder action is requested.21
Directors of a Delaware corporation owe a fiduciary duty to disclose accurate information to shareholders even in the absence of a request for shareholder action.22
Whether the complaint filed by the plaintiffs states a cognizable claim for breach of fiduciary duty against the director defendants?23
A complaint should be dismissed for failure to state a claim only when it appears with reasonable certainty that a plaintiff would not be entitled to the relief sought under any set of facts which could be proven to support the action.24 The court must accept all well-pleaded allegations of fact as true.25
No. The complaint alleged that the director defendants knowingly and intentionally caused Mercury to disseminate materially false information.26 It further alleged that the company lost approximately $2 billion in value as a result.27 Nevertheless, the complaint failed to expressly assert a derivative claim on behalf of the corporation.28 It also failed to allege compliance with Court of Chancery Rule 23.1.29 Finally, the complaint did not articulate whether the action was brought individually, as a class, or derivatively with an appropriate remedy.30
The complaint as filed does not state a cognizable claim for breach of fiduciary duty against the director defendants.31
Whether the aiding and abetting claim against KPMG Peat Marwick LLP states a claim upon which relief can be granted?32
Without a well-pleaded allegation in the complaint for a breach of fiduciary duty, there can be no claim for aiding and abetting such a breach.33
No. The complaint alleged that KPMG knowingly participated in the directors' breaches of their fiduciary duty of disclosure.34 Because the underlying allegations against the director defendants do not state a cognizable claim for breach of fiduciary duty, the aiding and abetting claim against KPMG was also properly dismissed.35
The aiding and abetting claim against KPMG Peat Marwick LLP does not state a claim upon which relief can be granted.36
Whether the Court of Chancery's dismissal of the complaint should have been with prejudice rather than without prejudice?37
Plaintiffs are entitled to file an amended complaint to assert a properly cognizable cause of action if the dismissal is without prejudice.38
No. The Court of Chancery properly granted the motions to dismiss because the complaint failed to state a cognizable claim.39 The plaintiffs should have been permitted to replead to assert a derivative claim.40 They should also have been permitted to assert an individual cause of action or a class claim with an appropriate remedy.41 Therefore the dismissal should have been without prejudice.42
The Court of Chancery's dismissal of the complaint should not have been with prejudice.43