## Facts

- The Sutherland family owned all of the stock of Dardanelle Timber Company, Inc. (Dardanelle), a Delaware corporation.
- Dardanelle was the sole shareholder of Sutherland Lumber-Southwest, Inc. (Southwest).
- Perry H. Sutherland and Todd L. Sutherland were controlling stockholders of Dardanelle and also served as directors and officers of both Dardanelle and Southwest.
- Mark B. Sutherland served as the third director of both corporations but held no equity interest.
- Martha S. Sutherland was a minority stockholder of Dardanelle and previously served as a director of Southwest until she was removed in 2004.
- The certificates of incorporation of both Dardanelle and Southwest included an exculpatory provision that purported to permit directors to enter into self-interested transactions with the corporation if the interest was disclosed to the other directors and the board approved the transaction; the provision also stated that the interested directors could vote on the approval.
- In 2006, Martha filed a derivative action on behalf of Dardanelle and a double-derivative action on behalf of Southwest against Perry, Todd, and Mark.
- The complaint alleged waste and breaches of fiduciary duty, asserting that Perry and Todd, with Mark’s acquiescence, caused the companies to provide personal benefits and other non-corporate payments, including personal flights, tax and accounting services, and excessive compensation and similar perquisites.
- Defendants moved to dismiss for failure to state a claim, relying in part on the charter provisions as a defense to liability for the challenged conduct.

## Issues

1. Whether charter provisions purporting to permit and “approve” director self-interested transactions (including votes by interested directors) can eliminate or materially limit fiduciary-duty claims based on alleged self-dealing.
2. Whether the complaint’s allegations of personal benefits and excessive compensation stated non-exculpated claims for breach of fiduciary duty and corporate waste at the pleading stage.
3. Whether board approval, when given by directors alleged to be interested in the transactions, warranted business judgment deference on a motion to dismiss.

## Decision

- The Court of Chancery denied the motion to dismiss in substantial part, allowing the core derivative and double-derivative claims to proceed past the pleading stage.
- The court rejected the defendants’ attempt to treat the charter language as a broad authorization for conflicted conduct, holding that a corporation cannot use charter provisions to excuse or eliminate the duty of loyalty.
- The court held that, at the pleading stage, allegations that controllers caused the corporations to pay personal expenses and provide non-corporate benefits supported claims for disloyalty and waste that were not defeated by an exculpatory provision.
- The court declined to apply business judgment deference based solely on “board approval” where the alleged approvers were themselves interested and the challenged transactions were alleged to be one-sided transfers of value to insiders.

## Legal Principles

- Delaware law permits charter-based exculpation for certain monetary liability, but it does not allow a charter to waive the duty of loyalty or to authorize unfair self-dealing without meaningful limits.
- A provision stating that directors may engage in conflicted transactions if disclosed and approved cannot be read as a blanket permission for insiders to take corporate assets for personal benefit.
- At the motion-to-dismiss stage, well-pled allegations that controlling directors extracted personal benefits and caused the corporation to fund personal expenses can support loyalty and waste claims.
- Approval of a conflicted transaction by directors who are alleged to be interested in that transaction does not, by itself, restore business judgment protection at the pleading stage; allegations of self-interest and one-sided benefit may trigger a fairness-based review framework.

## Conclusion

The Court of Chancery held that the corporations’ charter provisions could not be used to shield alleged insider self-dealing from judicial review, and it allowed Martha Sutherland’s derivative and double-derivative claims for disloyal conduct and waste—based on alleged personal benefits and excessive compensation provided to controlling directors—to proceed beyond dismissal.


Sutherland v. Sutherland, 2009 WL 857468 (Del.Ch.) (2009)