Delaware Entire Fairness Standard Inapplicable to Breach of Contract Pleading Standards

On December 30, 2021, Justice Masley of the New York County Commercial Division issued a decision in Meshechok v. Corporate Solutions Group I, LLC, 2021 NY Slip Op. 32839(U), holding that the Delaware Entire Fairness standard does not apply to breach of contract pleading standards, explaining:

Plaintiff contends that Kaplan licensed the trade secret from the Companies to other entities controlled solely by Kaplan. Plaintiff asserts that the Kaplan Owned Entities collected revenue from the trade secret bypassing the Companies to avoid royalty payments to them. Plaintiff argues that the court overlooked these allegations and that Kaplan’s conduct violates Delaware’s Entire Fairness Doctrine. Plaintiff asks the court to reinforce that Plaintiff’s individual contract claim enables the assessment of diverted Trade Secret proceeds under the Entire Fairness standard and further permits these proceeds to be recovered by Plaintiff or deemed a part of the Companies profits for purposes of calculating Plaintiff’s distributive share.

The fundamental principle of Delaware law is that the business and affairs of a corporation are managed by or under the direction of its board of directors. In exercising these powers, directors are charged with an unyielding fiduciary duty to protect the interests of the corporation and to act in the best interests of its shareholders. When a transaction is challenged on the grounds that a director is self-interested, and the transaction is beneficial to that director, there are three safe harbors to prevent nullification of potentially beneficial transactions simply because of director self-interest. These safe harbors include the invocation of the Business Judgment Rule and the Entire Fairness standard. The business judgment rule

posits a powerful presumption in favor of actions taken by the directors in that a decision made by a loyal and informed board will not be overturned by the courts unless it cannot be attributed to any rational business purpose. Thus, a shareholder plaintiff challenging a board decision has the burden at the outset to rebut the rule’s presumption. To rebut the rule, a shareholder plaintiff assumes the burden of providing evidence that directors, in reaching their challenged decision, breached any one of the triads of their fiduciary duty–good faith, loyalty or due care. If a shareholder plaintiff fails to meet this evidentiary burden, the business judgment rule attaches to protect corporate officers and directors and the decisions they make, and our courts will not second-guess these business judgments. If the rule is rebutted, the burden shifts to the defendant directors, the proponents of the challenged transaction, to prove to the trier of fact the entire fairness of the transaction to the shareholder plaintiff. Under the entire fairness standard of judicial review, the defendant directors must establish to the court’s satisfaction that the transaction was the product of both fair dealing and fair price.

Here, plaintiff is seeking to extend the Entire Fairness standard to the evaluation of his breach of contract claims. Plaintiff fails to cite any law to support this position. The Entire Fairness standard applies to breach of fiduciary duty claims, and there is no indication that the Delaware courts have extended its application beyond fiduciary duty claims. This court declines to do so.

(Internal quotations and citations omitted).

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