Shocking Technologies, Inc. v. Michael, C.A. No. 7164-VCN (Del. Ch. Apr. 10, 2012) (Noble, V.C.)

In this letter opinion, the Court of Chancery granted defendants’ motion to dismiss a breach of fiduciary duty claim that sought removal of a director pursuant to the Court’s inherent equitable powers. While the Court allowed the general fiduciary duty claim against the director to survive, it dismissed the removal claim without deciding the issue as to whether the Court has the equitable power to remove a director outside of an action brought pursuant to Section 225(c) of the Delaware General Corporation Law (the “DGCL”).

Shocking Technologies, Inc. (the “Company”) brought a claim against one of its current directors asserting he interfered with the Company’s efforts to raise capital. The director was alleged to have done so to benefit other companies in which he had a controlling ownership interest. The Company also brought an aiding and abetting claim against the entities affiliated with the director. The Company claimed that the director’s alleged loyalty breach entitled it to secure the removal of the director from the board, arguing that the Court may remove a director pursuant to its inherent equitable powers. Defendants argued that Section 225(c) of the DGCL, which grants the Court the express authority to remove a director from office based on a prior felony conviction or judgment on the merits against the director for breach of the duty of loyalty, is the only basis upon which the Court may remove a director and the plaintiff had not satisfied the statutory requirements.

In addressing the claim for removal of the director, the Court expressly declined to decide the issue of whether the Court has inherent equitable powers to remove a director. The Court concluded that “this action is not so unusual and does not involve such pressing issues that the Court would be moved to exercise any inherent equitable powers (if, indeed, it has such power) it might have to remove a director outside of a § 225(c) action.” Accordingly, the Court dismissed the Company’s fiduciary duty claim against the director, without prejudice, to the extent that it sought his removal. The Court noted that if the Company prevailed on the surviving loyalty claim against the director, such a judgment could serve as the basis for a subsequent Section 225(c) action.

Because the trial to determine whether the director breached his fiduciary duties was scheduled for the following week, the Court held that it was premature to address a motion to dismiss the aiding and abetting claim.  If the Court found the director not liable for a breach following the trial, that judgment would moot the aiding and abetting claim.  Therefore, the Court declined to address the defendants’ motion to dismiss the remaining claims.

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