## Facts

- Mercury Finance Company was a publicly held Delaware corporation.
- Stockholders brought individual and class claims alleging Mercury’s directors intentionally overstated Mercury’s financial condition in repeated disclosures over several years.
- The challenged disclosures included SEC filings and other public communications to shareholders and the market.
- Plaintiffs alleged the false disclosures contributed to a collapse in corporate value of approximately $2 billion.
- Plaintiffs sued the directors for breach of fiduciary duties in making false and misleading disclosures.
- Plaintiffs also sued Mercury’s outside auditor, KPMG Peat Marwick LLP, for aiding and abetting the directors’ alleged fiduciary breaches.
- The Court of Chancery dismissed the complaint with prejudice under Rule 12(b)(6), reasoning the fiduciary “duty of disclosure” arises only when directors seek shareholder action, and further concluding the pleading did not satisfy Rule 23.1 for any derivative theory.
- Plaintiffs appealed.

## Issues

1. Whether directors’ fiduciary obligations regarding accuracy and completeness apply to public or shareholder communications even when no shareholder vote, tender, or other action is being solicited.
2. Whether the complaint stated a cognizable direct and/or derivative fiduciary-duty claim based on allegedly knowing false disclosures, and whether dismissal with prejudice was proper given the pleading deficiencies (including Rule 23.1).

## Decision

- The Delaware Supreme Court held that whenever directors communicate publicly or directly with shareholders about the corporation’s affairs, they owe fiduciary duties of due care, good faith, and loyalty, and the minimum requirement is honesty.
- The court rejected the view that fiduciary disclosure duties are limited to situations involving a request for shareholder action.
- The court agreed the complaint, as pleaded, did not properly assert a derivative claim because it failed to comply with Rule 23.1 (demand or demand-futility pleading) and did not clearly plead derivative standing.
- The court affirmed dismissal of the complaint in its then-current form but reversed the “with prejudice” aspect.
- The case was remanded to permit plaintiffs to amend to plead a cognizable cause of action consistent with the clarified fiduciary-duty standards.

## Legal Principles

- Directors’ fiduciary obligations to the corporation and its shareholders include due care, good faith, and loyalty; “disclosure” duties are a context-specific application of these duties rather than a separate, free-standing duty.
- When directors choose to speak to shareholders or the public about corporate affairs, they must speak truthfully and not misleadingly, regardless of whether they are seeking shareholder action.
- Knowingly disseminating false information that causes corporate injury and/or harm to individual stockholders can constitute a fiduciary breach, with the proper remedial form (direct, derivative, class, or combination) depending on the nature of the alleged injury.
- There is no general fiduciary obligation to provide continuous updates, but once directors speak, they must do so honestly and with appropriate care.
- A derivative theory must satisfy Court of Chancery Rule 23.1, including demand or particularized demand-futility allegations; failure to do so warrants dismissal of the derivative aspect as pleaded.
- Where potentially valid fiduciary claims may be stated, dismissal with prejudice is improper if amendment could cure pleading defects.

## Conclusion

The Delaware Supreme Court held directors owe shareholders a fiduciary duty of honesty whenever they communicate about corporate affairs, even absent any solicitation of shareholder action, and it required that plaintiffs be allowed to amend after dismissal for pleading defects rather than being barred by a dismissal with prejudice.


Malone v. Brincat, 722 A.2d 5 (Del. 1998)