While the courts of Delaware have routinely observed that the governance documents for Delaware corporations—the charter and the bylaws—reflect a type of contractual relationship between and among the stockholders, the corporation and the corporation’s board of directors, such a contractual relationship does not always give rise to potential claims for breach of contract where directors are alleged to have caused the company to breach specific provisions of a charter.

Rather, in most such instances, where directors are alleged to have caused the corporation to violate provisions in its charter (and which are alleged to cause harm to the corporation), stockholders will be required to bring claims for breaches of fiduciary duty against those directors rather that rely on derivative claims for breach of contract. In a Feb. 11 memorandum opinion ruling on a series of motions to dismiss, in Lacey v. Mota-Velasco, (C.A. No 2019-0312-SG), Vice Chancellor Sam Glasscock addressed this distinction in dismissing a stockholder’s derivative claims for breach of contract as duplicative of breach of fiduciary duty claims the court had previously held viable. While the “main event” for the Lacey opinion is this discussion regarding claims for breach of contract versus those for breaches of fiduciary duty, the opinion also contains a helpful reminder for when claims against a majority stockholder for breaches of fiduciary duty can survive a motion to dismiss.

Plaintiff Lacey, a stockholder of Southern Copper Corp. (Southern Copper), prosecuted this litigation challenging a series of allegedly conflicted transactions between Southern Copper and entities related to its controllers. Lacey’s complaint alleged claims for breach of fiduciary duty and breach of contract against members of Southern Copper’s board of directors and certain entities affiliated with Southern Copper’s ultimate controller. The foundational premise for both types of claims (fiduciary and contract) is Lacey’s argument that the corporate charter for Southern Copper requires that transactions between the corporation and its controllers be approved by an independent committee of directors. The challenged transactions, however, went forward without such approval and were on terms that were unfair to Southern Copper. In an earlier decision, the court had denied the defendants’ motion to dismiss after finding that the claims for breach of fiduciary duty against the director defendants were well-pled and could continue.

Southern Copper operates mining, smelting and refining operations in Mexico and Peru that produce copper and other minerals. Southern Copper’s majority stockholder is Americas Mining Corporation (AMC), which is wholly owned by Grupo Mexico S.A.B. de C.V. (Grupo Mexico). With these relationships in mind, Southern Copper’s charter contains a provision that prohibits Southern Copper from entering into transactions with values greater than $10,000,000 with Grupo Mexico or any of its affiliates unless it has been reviewed by committee of independent Southern Copper directors. According to the plaintiff, discovery in prior litigation showed that since 2004, Southern Copper had engaged in “dozens” of transactions that would trigger this required review, but that only one transaction had appeared to actual have been reviewed by such an independent committee of directors. Lacey’s complaint challenges a subset of those transactions.

The plaintiff’s derivative breach of contract claim was “premised on the theory that the directors can be liable in damages to Southern Copper itself, for Southern Copper’s same failure to abide by the Charter, under a theory of breach of contract.” The court began its analysis of this claim with its examination of whether a contract claim, had indeed, been stated, with its recognition that a certificate of incorporation “is, foremost, an agreement by the chartering authority (here, the state of Delaware) and the entity, allowing the corporation to exist and to order its own affairs … .” Stockholders, the court holds, acquire stock in reliance on this relationship, and “therefore, a corporate charter is appropriately viewed as an agreement among stockholders, the corporation, and the directors.” While the courts of Delaware have found these relationships to provide a mechanism for stockholders to pursue direct claims for breach of contract against the corporation premised on a breach of a charter provision that has caused harm to that stockholder, the question posed for the Delaware Court of Chancery by Lacey’s claims was different: “May the corporation (derivatively) bring an action for damages in contract against its directors for allowing the corporation to violate a provision of its charter?” Vice Chancellor Glasscock held such derivative claims for a breach of a charter provision could not survive the motion to dismiss, stating: “A board’s failure to cause a corporation to comply with its charter, standing alone, does not create a chose-in-action on the part of the corporation against the directors sounding in contract, although it may well create a breach of fiduciary duty claim.”

This was so, according to the court, because while the charter “provides the contours of rights owed to a corporation’s stockholders, … fiduciary duties are the legal framework in which those rights are enforced on behalf of the corporation in an action for damages against the directors.” Such a distinction was also found to be fair as a matter of policy. Simply put, directors’ duties “require that they act on the corporation’s behalf without gross negligence or disloyalty.” Breach of contract claims, however, “employ[] an objective standard” which operates without regard to the “state of mind of the breaching party” and is, therefore, “inimical to the standards … [of] loyalty and care” and would potentially cause directors to face liability for conduct that would otherwise be exculpated by a Section 102(b)(7) charter provision.

The court also dismissed certain claims for breach of fiduciary duty against Southern Copper’s controlling stockholder, AMC. As the court noted, “A majority stockholder, when it manipulates the corporate machinery as a controller, is a fiduciary to the minority.” The complaint, however, failed to allege specific facts about how AMC utilized the corporate machinery to cause the director defendants to take action. Rather, the court found that “[t]he Amended Complaint simply alleges the chain of control and asserts that liability must attach as a result” and such allegations, without more, were not sufficient to state a claim for breach of fiduciary duty against the controlling stockholder for certain transactions (where AMC did not stand on both sides of the transaction).

Richard L. Renck, a partner at Duane Morris, litigates matters in both the state and federal courts in Delaware. His practice focuses on complex corporate and commercial litigation with a particular emphasis on corporate governance disputes and statutory actions arising under the Delaware General Corporation Law.

Reprinted with permission from Delaware Business Court Insider, © ALM Media Properties LLC. All rights reserved.