The directors of Mercury
(along with their auditor KPMG) were releasing reports containing
overstatements of Mercury's earnings and assets. As a result of these
overstatements, Mercury lost virtually all of its value and its
shareholders lost a lot of money.
The shareholders filed a class
action lawsuit against the directors and KPMG.
The shareholders argued that
the directors had breached their fiduciary duty by not disclosing the actual financial state of the corporation.
The directors argued that
under Delaware State law, there owed no fiduciary duty of disclosure to the shareholders.
The Trial Court found for the
directors. The shareholders appealed.
The Trial Court found that
the directors have no fiduciary duty of disclosure in the absence of a request for shareholder
action.
The Court found that when a
shareholder is damaged merely as a result of the release of inaccurate
information into the marketplace, unconnected with any Delaware corporate
governance issue, that shareholder needs to seek remedy under Federal
law, not Delaware law.
The Appellate Court affirmed
in part and reversed in part.
The Appellate Court found
that unless there is a request for shareholder action, there is no duty
to disclose.
However, the Court found
that directors who knowingly disseminate false information that results
in corporate injury to an individual stockholder have violated their fiduciary
duty.
The Court noted that the
directors had breached their fiduciary duty of loyalty and good faith.
The Court found that there
was some ambiguity as to whether the shareholders were bringing a
class-action suit or a derivative suit. So they dismissed the complaint
and told the shareholders to better explain what they wanted and try
again.
Basically, this case stands
for the proposition that directors have a duty to speak truthfully
whenever they choose to speak, whether or not shareholder action is
required.
