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General Corporation Law § 102(b)(7), while Maryland law allows a corporation to shield its directors from all liability other than for “active and deliberate dishonesty.” Md.Code, Courts and Judicial Proceedings § 5–418(a)(2).
Delaware law, however, creates an exception for suits against directors of a corporation—an exception not to the requirement that there be proof of causation but to the requirement that the plaintiff prove causation rather than the defendant's having to prove absence of causation. Technicolor, Inc., 634 A.2d 345, 360–61 (Del.1993).
To explain: When a director is sued for breach of his duty of loyalty or care to the shareholders, his first line of defense is the business-judgment rule, which creates a presumption that a business decision, including a recommendation or vote by a corporate director, was made in good faith and with due care. But the presumption can be overcome by proof that the director breached his fiduciary duty to the corporation—his duty of loyalty and his duty to exercise due care in its performance. Delaware law permits the shareholders to adopt (and Cadant's shareholders did adopt) a charter provision exculpating directors from liability in damages for failure to exercise due care, but does not enforce a provision exculpating them from liability for disloyalty, Emerald Partners v.
The first point—that the burden of proof on the issue of causation was on the defendants—is counterintuitive.
Ordinarily the burden of proving causation is on the plaintiff, since without an injury caused by the defendant there is no tort no matter how wrongful the defendant's behavior was. Mc Neil Consumer Healthcare, 615 F.3d 861, 865–66 (7th Cir.2010).
The founders received common stock in the new corporation at the outset. He is the director principally accused of disloyalty to Cadant. This is what is known as the “internal affairs” doctrine—“a conflict of laws principle which recognizes that only one State should have the authority to regulate a corporation's internal affairs—matters peculiar to the relationships among or between the corporation and its current officers, directors, and shareholders—because otherwise a corporation could be faced with conflicting demands.” Edgar v. Maryland law applied at that time and under that law directors have no duty to “accept, recommend, or respond on behalf of the corporation to any proposal by an acquiring person.” Md. Morgan before the loan was made, while remaining a director of Cadant. The plaintiff was injured when a heavy metal scale collapsed on the railroad platform on which she was standing.
In April 2000 the board turned down a tentative offer by ADC Telecommunications to buy Cadant's assets for 0 million. Code, Corporations and Associations § 2–405.1(d)(1). In the fall of 2000, Cadant found itself in financial trouble. The loan was a “bridge loan,” which is a short-term loan intended to tide the borrower over while he seeks longer-term financing. The scale had buckled from damage caused by fireworks dropped by a passenger trying, with the aid of a conductor, to board a moving train at some distance from the scale.
The plaintiff presented evidence of disloyalty, as we'll see later, but we are uncertain whether it proves “active and deliberate dishonesty.” The briefs virtually ignore the issue, and we cannot find a case decided by a Maryland court that construes the term.
An unpublished decision by the Fourth Circuit interprets the term in the Maryland statute as including fraud, Hayes v. App'x 857, 865 (4th Cir.2003), which is a possible characterization of the defendants' alleged conduct in the present case. Richardson, 817 F.2d 1203, 1210 (5th Cir.1987), construes the identical term appearing in a liability insurance policy to cover “wilful neglect of duties,” embezzlement, and fraud—and willful neglect of duties seems a pretty good description of the defendants' alleged wrongdoing.
The dot-com bubble was primarily in the stocks of firms that marketed their goods or services over the Internet.
Cadant did not, and anyway it was in the hardware business, the fortunes of which depend on the volume of Internet traffic, which continued to increase even after the bubble burst.
And if there was disloyalty in this case it was deliberate, and maybe that's enough to prove “active and deliberate dishonesty.”We needn't decide, because we think the Delaware statute controls, so far as the bridge loans are concerned, and they are the focus of the suit. It was on November 8, 2000, that Cadant's board formally approved the decision to reincorporate, in a resolution which stated that “the Board believes that the State of Delaware has an established body of case law that better enables the Board effectively to meet its fiduciary obligations to the stockholders of the Company.” Copeland's failure to disclose disloyal acts that he committed during the negotiation was a disloyal act that caused the loan to be approved, and it was approved in January, after the company had reincorporated under Delaware law.