Going Private Outside of Delaware? An MBCA Director Raincoat Keeps Board Members Dry
23 Pages Posted: 5 Apr 2022 Last revised: 29 Jun 2022
Date Written: June 28, 2022
In the typical “going private” corporate merger a controlling shareholder converts the company
to closely held status by acquiring the publicly traded shares of minority stockholders. And when
controlling shareholders engage in such transactions, the deal typically entails disinterested
approval processes laid out in Delaware’s MFW jurisprudence and in Model Business Corporation
Act (“MBCA”) Section 13.40(b)(3). Qualified corporate directors should be encouraged to
participate in these critical decisions without fear of disproportionate liability risks. Meade v.
Christie et al., a new precedent from the Iowa Supreme Court concerning application of director
liability shield or “raincoat” laws in going private litigation, promises to accomplish that. This
Article considers the Meade decision and its implications.
Meade dismissed shareholder class action claims against directors who approved a going
private merger. Dismissal was based on a director liability shield patterned on the MBCA template,
which forbids exculpation of directors for certain claims, including those based on “intentional
infliction of harm on the corporation or the shareholders.” The Article explores and supports
Meade’s key holding that this exception does not encompass claims against directors for
“conscious disregard” or “intentional dereliction” of duty.
The Article also evaluates Meade’s answers to procedural questions that aren’t fully resolved
by the MBCA shield text. The Iowa court clarified that plaintiffs aren’t required to initially plead
shield exceptions when suing corporate board members, but also confirmed that directors can raise
the shield in a motion to dismiss prior to filing an answer. And invocation of the shield, Meade
held, triggers “heightened” pleading standards that require the court to evaluate whether the
plaintiff pled facts showing claims that fall within one of the MBCA’s exceptions to exculpation.
If, as the Meade court concluded, all the petition’s allegations show there is no such claim, the
court can dismiss the case even before discovery begins.
This newly announced heightened pleading standard is more onerous than traditional state
court “notice” pleading requirements that permit most cases to reach the discovery phase. But as
the Article explains, the MBCA shield exceptions are narrowly drawn, and corporate litigants have
access to information about potential director misconduct from corporate and securities law
sources outside of litigation discovery. And by protecting directors not only from paying damages,
but also from the burdens of pretrial litigation over shielded claims, the new pleading standard
advances the purpose of raincoat provisions: to reduce fiduciary litigation risks for directors and
thereby encourage board service.
Keywords: corporate director liability, mergers, going private transactions, non-shareholder constituency statutes, director exculpation, director liability shields
JEL Classification: K22
Suggested Citation: Suggested Citation