“Though this board acted ‘badly’—with gross negligence—this board did not act in bad faith.” —Chandler, Chancellor 

Facts: A complaint was filed in Delaware Court by John McPadden that alleged the following facts. i2 Technologies, Inc. (i2) is a Delaware corporation headquartered in Dallas, Texas. The company sells supply chain management software and related consulting services. Section 102(b)(7) of the Delaware Corporation Code permits Delaware corporations to include in their certificate of incorporation an exculpatory provision to protect directors from personal liability arising from their ordinary or gross negligence in the performance of their duties as directors. i2 included this exculpatory provision in its certificate of incorporation. Trade Services Corporation (TSC) was a wholly owned subsidiary of i2. Anthony Dubreville was TSC’s vice president. VisionInfoSoft and its sister company, Material Express.com (together VIS/ME), a competitor of TSC, made an offer to the i2 board of directors to purchase TSC for $25 million. The i2 board of directors did not accept the offer. Over the next year, Dubreville engaged in conduct whereby he artificially depressed the value of TSC by overstating costs, inaccurately reporting TSC’s performance, and engaging in transactions with a company that Dubreville partially owned, to the detriment of TSC and windfall profits to Dubreville’s company. Dubreville informed TSC employees that he was leading a management group to purchase TSC. Subsequently, the i2 board of directors decided to sell TSC. With knowledge that Dubreville was interested in purchasing TSC, the i2 directors appointed Dubreville to find a buyer for TSC and conduct the sale process. Dubreville was aware of VIS/ME’s previous offer to purchase TSC. However, Dubreville did not contact VIS/ ME or other competitors of TSC to see if any of these companies were interested in buying TSC. The Dubreville-led group formed Trade Services Holdings, LLC (Holdings) and offered to purchase TSC for $3  million. TSC’s management, under Dubreville’s direction, prepared projections of TSC’s future profitability. These projections negatively painted TSC’s financial future. Without negotiating with the Dubreville-led group, the i2 board of directors approved the sale of TSC to Holdings for $3 million. The i2 directors did not contact VIS/ME, who had previously made a $25 million bid to them to purchase TSC. The directors did not contact any competitor of TSC to see if they would be interested in buying TSC. Six months after the sale, VIS/ME made an offer to Holdings to purchase TSC for $18 million. This offer was rejected. Eighteen months later, Holdings sold TSC for $25 million. John McDadden, a shareholder of i2, brought suit in Delaware court. The suit alleged that the board of directors of i2 acted in bad faith when they sold TSC to the Dubreville-led group for $3 million. The suit also named Dubreville as a defendant, alleging that he violated his duty of loyalty in the sale of TSC to himself and other managers of TSC. The defendants filed motions to dismiss the plaintiff’s case. Issue Did the plaintiff plead sufficient facts of i2’s board of directors bad faith and Dubreville’s breach of the duty of loyalty to withstand the defendants’ motions to dismiss? 

Language of the Court: As authorized by Section 102(b)(7), i2’s certificate of incorporation contains an exculpatory provision, limiting the personal liability of directors for certain conduct. Certain conduct, however, cannot be exculpated, including bad faith actions. Gross negligence, in contrast, is exculpated because such conduct breaches the duty of care. The conduct of the Director Defendants here fits precisely within this understanding of gross negligence. Because such conduct breaches the Director Defendants’ duty of care, this violation is exculpated by the Section 102(b) (7) provision in the Company’s charter and therefore the Director Defendants’ motion to dismiss for failure to state a claim must be granted. Though this board acted “badly” with gross negligence this board did not act in bad faith. Therefore, with the benefit of the protections of the Company’s exculpatory provision, the motion to dismiss is granted as to the Director Defendants. Defendants’ motion is, however, flatly denied as to Dubreville. 

Decision: The Court of Chancery of Delaware dismissed the plaintiff’s case against i2’s directors. The court permitted the plaintiff’s case against Dubreville to proceed. 

Ethics Questions: Did Dubreville act unethically in this case? Did i2’s directors act unethically in this case? What purpose does Delaware’s law that relieves directors from personal liability for their ordinary and gross negligence serve?