Delaware Supreme Court Clarifies Standard for Liability for Disclosure Violations
In Dohmen v. Goodman, the Delaware Supreme Court, in response to a certified question of law from the US Court of Appeals for the Ninth Circuit, provided significant guidance regarding the showing required for a plaintiff to seek compensatory damages for claims arising out of alleged disclosure violations. The Court distinguished between claims for a breach of the fiduciary duty of disclosure—which occur in situations in which the board makes a material misrepresentation or omits a material fact when seeking action from stockholders generally—and claims for breach of fiduciary duty that occur where the directors communicate with stockholders outside of the context of a request for stockholder action and knowingly disseminate false information. The Court confirmed that violations of the fiduciary duty of disclosure may give rise to damages liability per se, but that the per se rule presumes only nominal damages. The Court also confirmed that, in cases where the disclosure violation occurs outside of a request for action by stockholders generally, the per se rule does not apply, and that a plaintiff must demonstrate that a fiduciary acted with scienter—that is, knowingly disclosed false information—to state a claim for breach of fiduciary duty. In either case, to receive an award of compensatory damages, a plaintiff must satisfy its burden to prove reliance and causation.