Malpiede v. Townson

Frederick’s of Hollywood (Frederick) was the target of a bidding contest between Knightsbridge Capital Corporation (Knightsbridge) and two other suitors. After several rounds of bidding, Knightsbridge made an offer of $7.75 per share on September 6, 1997. The offer was conditioned on Frederick’s accepting strict limitations on its ability to entertain other offers. Frederick’s board unanimously accepted Knightsbridge’s terms. On September 11, 1997, Veritas, Inc. made an offer of $9 per share. Frederick’s board rejected the offer, citing the agreed-upon restrictions among other factors. Knightsbridge ultimately completed the merger and acquired Frederick. Frederick’s articles of incorporation included an exculpatory provision pursuant to Delaware General Corporation Law (DCL) § 102(b)(7). The provision shield its directors from personal liability provided they have not acted in bad faith or breached their duty of loyalty to the corporation. Disaffected Frederick shareholders (plaintiffs) sued the directors of Frederick, arguing that they breached their fiduciary duty. They asserted that one of the four directors received improper personal benefits from the transaction, and that together they improperly favored Knightsbridge over other bidders. The trial court dismissed the suit for failure to state a claim, ruling that the directors were shielded by the exculpatory provision. The shareholders appealed.