In the
United States Court of Appeals
For the Seventh Circuit
No. 10-1953
CDX L IQUIDATING T RUST,
Plaintiff-Appellant,
v.
V ENROCK A SSOCIATES, et al.,
Defendants-Appellees.
Appeal from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 04 C 7236—Charles R. Norgle, Sr., Judge.
A RGUED F EBRUARY 16, 2011—D ECIDED M ARCH 29, 2011
Before P OSNER, FLAUM, and SYKES, Circuit Judges.
P OSNER, Circuit Judge. This suit, brought by a trust
that holds the common stock of a bankrupt company
formerly known as Cadant, charges several former direc-
tors with breaches of their duty of loyalty to the corpora-
tion, and charges two venture-capital groups, which
we’ll abbreviate to “Venrock” and “J.P. Morgan,” with
aiding and abetting the disloyal directors. Trial was
bifurcated. Seven weeks into the trial on liability the
2 No. 10-1953
plaintiff rested and the defendants then moved for judg-
ment as a matter of law. The district judge granted
the motion with a brief oral statement of reasons, precipi-
tating this appeal.
Cadant had been created in 1998 to develop what are
called “cable modem termination systems,” which enable
high-speed Internet access to home computers. Though
based in Illinois, Cadant initially was incorporated in
Maryland and later was reincorporated in Delaware. The
founders received common stock in the new corporation
at the outset. Others purchased common stock later.
Venrock and J.P. Morgan received preferred stock in
exchange for an investment in the new company that
they made at the beginning of 2000. Eric Copeland, a
principal of Venrock, became a member of Cadant’s five-
member board of directors. He is the director principally
accused of disloyalty to Cadant.
In April 2000 the board turned down a tentative offer
by ADC Telecommunications to buy Cadant’s assets for
$300 million. It was later that year that the board pro-
posed and the shareholders approved the reincorporation
of Cadant in Delaware, effective January 1, 2001. The suit
involves decisions by Cadant’s board made both when
Cadant was incorporated in Maryland and when it was
reincorporated in Delaware. Illinois choice of law princi-
ples, which govern this case because it was filed in
Illinois, makes the law applicable to a suit against a
director for breach of fiduciary duty that of the state of
incorporation. Newell Co. v. Petersen, 758 N.E.2d 903, 923-24
(Ill. App. 2001). This is what is known as the “internal
No. 10-1953 3
affairs” doctrine—“a conflict of laws principle which
recognizes that only one State should have the authority
to regulate a corporation’s internal affairs—matters
peculiar to the relationships among or between the corpo-
ration and its current officers, directors, and sharehold-
ers—because otherwise a corporation could be faced
with conflicting demands.” Edgar v. MITE Corp., 457 U.S.
624, 645 (1982); see also Nagy v. Riblet Products Corp., 79
F.3d 572, 576 (7th Cir. 1996); Restatement (Second) of
Conflicts of Laws § 309 (1971). The earliest challenged
decision by Cadant’s board—the decision not to respond
to ADC’s acquisition offer in April 2000—thus is easily
dismissed. Maryland law applied at that time and under
that law directors have no duty to “accept, recommend,
or respond on behalf of the corporation to any proposal
by an acquiring person.” Md. Code, Corporations and
Associations § 2-405.1(d)(1).
In the fall of 2000, Cadant found itself in finan-
cial trouble. The defendants attribute this to the de-
flating—beginning in the spring of 2000 and continuing
throughout the year and into the next year—of the dot-
com bubble of the late 1990s. We’ll return to the question
of what caused Cadant’s financial distress, but whatever
the cause the company needed fresh investment. The
board considered a proposal from a group of Chicago
investors and a joint proposal from Venrock and J.P.
Morgan, and eventually decided on an $11 million loan
from Venrock and J.P. Morgan. The terms of the loan
were negotiated on Cadant’s behalf by Copeland. The
board of directors had grown to seven members, of
whom four, including Copeland, were employees of
4 No. 10-1953
Venrock or J.P. Morgan, though one of them, defendant
C.H. Randolph Lyon, resigned from J.P. Morgan before
the loan was made, while remaining a director of Cadant.
The loan was a “bridge loan,” which is a short-term
loan intended to tide the borrower over while he seeks
longer-term financing. The $11 million bridge loan to
Cadant was for only 90 days, at an annual interest rate
of 10 percent; it also gave the lenders warrants (never
exercised) to buy common stock of Cadant. Cadant ran
through the entire loan, which had been made in
January 2001, within a few months. Venrock and J.P.
Morgan then made a second bridge loan, in May, this
one for $9 million, again negotiated on Cadant’s behalf
by Copeland. The loan agreement provided that in the
event that Cadant was liquidated the lenders would
be entitled to be paid twice the outstanding principal of
the loan plus any accrued but unpaid interest on it;
as a result, little if anything would be left for the share-
holders. The disinterested directors of Cadant (the direc-
tors who had no affiliation with Venrock or J.P. Morgan)
who voted for the loan were engineers without fin-
ancial acumen, and because they didn’t think to retain
their own financial advisor they were at the mercy of
the financial advice they received from Copeland and
the other conflicted directors.
Cadant defaulted on the second bridge loan, and being
in deep financial trouble agreed to sell all its assets to a
firm called Arris Group in exchange for stock worth, when
the sale closed in January 2002, some $55 million. That
amount was just large enough to satisfy the claims of
No. 10-1953 5
Cadant’s creditors and preferred shareholders (Venrock
and J.P. Morgan were both). The sale was approved by
Cadant’s board, but also, as required by Delaware law
and the company’s articles of incorporation, by a simple
majority both of Cadant’s common and preferred share-
holders voting together as a single class and of the pre-
ferred shareholders voting separately.
The stock in the Arris Group that Cadant received in
exchange for Cadant’s assets became the property of the
bankrupt estate. It was the estate’s only asset, and its
value fell to a level at which Cadant was worth less than
the claims of the bridge lenders and other creditors,
with the result that the common shareholders were
wiped out. They brought this case initially as a free-
standing suit in federal district court. But in an earlier
decision in this long-running litigation, Kennedy v.
Venrock Associates, 348 F.3d 584 (7th Cir. 2003), we held
that the suit was a derivative suit—a suit on behalf of
the corporation against individuals and firms that had
injured it by wrongful conduct. A derivative suit is an
asset of the corporation, so if as in this case the corpora-
tion is in bankruptcy the suit is an asset of the bankrupt
estate. 11 U.S.C. § 541(a)(1); Pepper v. Litton, 308 U.S. 295,
306-07 (1939); Koch Refining v. Farmers Union Central
Exchange, Inc., 831 F.2d 1339, 1343-44 (7th Cir. 1987); In re
Ionosphere Clubs, Inc., 17 F.3d 600, 604 (2d Cir. 1994).
Our previous decision therefore directed that the suit
be treated as an adversary action in the bankruptcy
proceeding. Initially the district court referred the case
to the bankruptcy court, but the reference was with-
drawn and the case returned to the district court, pursu-
6 No. 10-1953
ant to 28 U.S.C. § 157(e), when the plaintiff demanded
a jury trial and the parties did not agree to allow the
bankruptcy judge to conduct it.
The district judge gave two independent grounds
for granting judgment as a matter of law for the defen-
dants. The first was that there was insufficient
evidence of proximate cause to allow a reasonable jury
to render a verdict for the plaintiff, and the second was
that there was likewise insufficient evidence of a
breach of fiduciary duty. These grounds turn out to
be intertwined. (Ordinarily the issue of duty would
precede that of cause, but no matter.)
The term “proximate cause” is pervasive in American
tort law, but that doesn’t mean it’s well understood.
A common definition is that there must be proof of
“some direct relation between the injury asserted and
the injurious conduct alleged.” Hemi Group, LLC v. City
of New York, 130 S. Ct. 983, 989 (2010), quoting Holmes
v. Securities Investor Protection Corp., 503 U.S. 258, 268
(1992). But “direct” is no more illuminating than “proxi-
mate.” Both are metaphors rather than definitions. What
the courts are trying to do by intoning these words is
to focus attention on whether the particular contribu-
tion that the defendant made to the injury for which
the plaintiff has sued him resulted from conduct that we
want to deter or punish by imposing liability, as in
the famous case of Palsgraf v. Long Island R.R., 162 N.E.
99 (N.Y. 1928) (Cardozo, C.J.). The plaintiff was injured
when a heavy metal scale collapsed on the railroad plat-
form on which she was standing. The scale had buckled
No. 10-1953 7
from damage caused by fireworks dropped by a
passenger trying, with the aid of a conductor, to board
a moving train at some distance from the scale. She sued
the railroad; it would have been unthinkable for her to
sue the scale’s manufacturer, even though if heavy
metal scales did not exist she would not have been in-
jured. No one would think the scale’s manufacturer
should be liable, because no one would think that tort
law should try to encourage manufacturers of scales to
take steps to prevent the kind of accident that befell
Mrs. Palsgraf. The railroad was a more plausible defen-
dant; its conductor had tugged the passenger aboard
while the train was already moving. But how could he
have foreseen that his act would have triggered an ex-
plosion, as distinct from a possible injury to the boarder?
If an accident is so freakish as to be unforeseeable,
liability is unlikely to have a deterrent effect.
Coming closer to our case, the defendants cite our
decision in Movitz v. First National Bank of Chicago, 148
F.3d 760 (7th Cir. 1998). The plaintiff had bought a
building in Houston in reliance on what he claimed was
the defendant’s misrepresentation of its value. Had it
not been for the misrepresentation he would not have
bought it. Shortly after the purchase the Houston real
estate market collapsed and his investment was wiped
out. The misrepresentation had not caused that col-
lapse but it had been a cause of the plaintiff’s buying
the building and thus had contributed to his loss. Yet we
ruled, without using the term “proximate cause,” that he
could not recover from the defendant because (among
other reasons) that would produce overdeterrence by
8 No. 10-1953
making the defendant an insurer of conditions that he
could not control. Id. at 763. That would be as futile as
making the manufacturer of the scale an insurer of
Mrs. Palsgraf’s loss.
The present case is superficially similar to Movitz
because it is possible that what did in Cadant and hence
its common shareholders (some at least of the preferred
shareholders—such as Venrock and J.P. Morgan—seem
to have come out all right) was not the defendants’
alleged misconduct but the collapse of the dot-com
bubble. And indeed the district court ruled that the
plaintiff had failed to prove that the defendants’ miscon-
duct had been a “proximate cause” of Cadant’s ruination,
just as in Movitz. But we disagree with his ruling in two
respects. First, the burden of proof on the issue of causa-
tion (or if one prefers, of “proximate causation”) was
on the defendants rather than on the plaintiff and the
judge cut off the trial before the defendants presented
their defenses. Second, there was enough evidence that
the bursting of the dot-com bubble did not account for
the entire loss to Cadant to make causation an issue
requiring factfinding and therefore for the jury to re-
solve. The dot-com bubble was primarily in the stocks
of firms that marketed their goods or services over
the Internet. Cadant did not, and anyway it was in
the hardware business, the fortunes of which depend
on the volume of Internet traffic, which continued to
increase even after the bubble burst. There may have
been a crossover effect; the collapse of stock values, and
the recession (mild though it was) that accompanied
it, reduced the amount of venture capital available for
No. 10-1953 9
technology companies generally, and so may have made
it difficult for Cadant to obtain needed investment on
reasonable terms. Our point is only that the effect of the
bubble’s bursting on Cadant was a jury issue, not an
issue that the judge could resolve because the effect
was incontestable.
The first point—that the burden of proof on the issue
of causation was on the defendants—is counterintuitive.
Ordinarily the burden of proving causation is on the
plaintiff, since without an injury caused by the
defendant there is no tort no matter how wrongful the
defendant’s behavior was. Robinson v. McNeil Consumer
Healthcare, 615 F.3d 861, 865-66 (7th Cir. 2010). Delaware
law, however, creates an exception for suits against
directors of a corporation—an exception not to the re-
quirement that there be proof of causation but to the
requirement that the plaintiff prove causation rather
than the defendant’s having to prove absence of causation.
To explain: When a director is sued for breach of his
duty of loyalty or care to the shareholders, his first line
of defense is the business-judgment rule, which creates
a presumption that a business decision, including a
recommendation or vote by a corporate director, was
made in good faith and with due care. E.g., Cede & Co. v.
Technicolor, Inc., 634 A.2d 345, 360-61 (Del. 1993). But
the presumption can be overcome by proof that the
director breached his fiduciary duty to the corpora-
tion—his duty of loyalty and his duty to exercise due
care in its performance. “If”—and here we come to the
nub of the causation issue in this case—“the [business-
10 No. 10-1953
judgment] rule is rebutted, the burden shifts to the de-
fendant directors, the proponents of the challenged
transaction, to prove to the trier of fact the ‘entire fair-
ness’ of the transaction to the shareholder plaintiff.” Id.
at 361; see also references in Teachers’ Retirement System
of Louisiana v. Aidinoff, 900 A.2d 654, 674-76 nn. 30-32
(Del. Ch. 2006).
Delaware law permits the shareholders to adopt (and
Cadant’s shareholders did adopt) a charter provision
exculpating directors from liability in damages for
failure to exercise due care, but does not enforce a provi-
sion exculpating them from liability for disloyalty, Emerald
Partners v. Berlin, 787 A.2d 85, 95-97 (Del. 2001), and that is
the charge in this case. But does Delaware law govern the
issue? Cadant’s articles of incorporation in both Maryland
and Delaware said that its directors would be exempted
from liability for breaches of fiduciary duty to the fullest
extent permitted by state law—and the two states’ laws
are, or at least may be, different. Delaware provides that
articles of incorporation “shall not eliminate or limit the
liability of a director . . . for any breach of the director’s
duty of loyalty to the corporation or its stockholders,” Del.
General Corporation Law § 102(b)(7), while Maryland
law allows a corporation to shield its directors from
all liability other than for “active and deliberate dishon-
esty.” Md. Code, Courts and Judicial Proceedings § 5-
418(a)(2). The plaintiff presented evidence of disloyalty,
as we’ll see later, but we are uncertain whether it
proves “active and deliberate dishonesty.” The briefs
virtually ignore the issue, and we cannot find a case
No. 10-1953 11
decided by a Maryland court that construes the term.
An unpublished decision by the Fourth Circuit inter-
prets the term in the Maryland statute as including
fraud, Hayes v. Crown Central Petroleum Corp., 78 Fed.
App’x 857, 865 (4th Cir. 2003), which is a possible charac-
terization of the defendants’ alleged conduct in the
present case. And Mississippi v. Richardson, 817 F.2d 1203,
1210 (5th Cir. 1987), construes the identical term ap-
pearing in a liability insurance policy to cover “wilful
neglect of duties,” embezzlement, and fraud—and
willful neglect of duties seems a pretty good description
of the defendants’ alleged wrongdoing. And if there
was disloyalty in this case it was deliberate, and maybe
that’s enough to prove “active and deliberate dishonesty.”
We needn’t decide, because we think the Delaware
statute controls, so far as the bridge loans are concerned,
and they are the focus of the suit. The negotiations
leading up to the first bridge loan took place in the fall
of 2000 and the loan was approved by Cadant’s board
on January 10, 2001—nine days after Cadant’s reincorpo-
ration in Delaware took effect. Some of the plaintiff’s
strongest evidence of the disloyalty of the conflicted
directors concerns Copeland’s actions during the nego-
tiation of the first loan, and the plaintiff argues that
that loan initiated the events which led to the despera-
tion sale of the company to Arris.
We cannot apply both states’ law to the first bridge
loan, and so we fall back (as did the court in the only
factually similar case we’ve found, Demoulas v. Demoulas
Super Markets, Inc., 677 N.E.2d 159, 169 (Mass. 1997)) to
12 No. 10-1953
general choice of law principles, see Restatement, supra,
§§ 309, 6, and ask which state’s law governing the duties
of directors the parties would have expected to govern
Cadant’s internal affairs in the critical period, and which
state had the greater regulatory interest in the corpora-
tion’s internal affairs then. See id., §§ 6(2)(c), (d); Resolu-
tion Trust Corp. v. Everhart, 37 F.3d 151, 153-54 (4th Cir.
1994). The answer to both questions is Delaware. It was
on November 8, 2000, that Cadant’s board formally ap-
proved the decision to reincorporate, in a resolution
which stated that “the Board believes that the State of
Delaware has an established body of case law that better
enables the Board effectively to meet its fiduciary ob-
ligations to the stockholders of the Company.” Copeland’s
failure to disclose disloyal acts that he committed
during the negotiation was a disloyal act that caused the
loan to be approved, and it was approved in January,
after the company had reincorporated under Delaware
law. The board would have assumed that, certainly from
that day forward, the duties of the directors relating
to both that loan and the second bridge loan would
be governed by Delaware law.
Apart from the board’s refusal to sell the company
to ADC Telecommunications, moreover—an act squarely
governed by Maryland law and exempted from liabil-
ity by that law because it was concluded before rein-
corporation was resolved upon, let alone accom-
plished—most of the disloyal acts of which the plain-
tiff complains occurred while Cadant was a Delaware
corporation, and most that occurred earlier occurred
after the board had decided that Delaware law made a
No. 10-1953 13
better fit with Cadant than Maryland law did. So
Delaware had a greater regulatory interest than
Maryland in the governance of Cadant’s internal affairs
in the critical period in which the events giving rise
to this lawsuit occurred.
We conclude that the articles of incorporation were
not effective in waiving Copeland’s and the other con-
flicted directors’ duty of loyalty, and so proof of their
disloyal acts (had the jury been permitted to find
that they’d indeed committed those acts) would have
placed on them the burden of proving the “entire fair-
ness” of the bridge loans. But, say our defendants, the
plaintiff still had to prove proximate cause and what
has “entire fairness” to do with that? In a case like this,
everything. For “in the review of a transaction involving
a sale of a company, the directors [once the application
of the business-judgment rule is rebutted] have the
burden of establishing that the price offered was the
highest value reasonably available under the circum-
stances,” Cede & Co. v. Technicolor, Inc., supra, 634 A.2d at
361—in other words, the burden of proving that the
shareholders did as well as they would have done had
the defendant directors been loyal and careful. That’s
another way of saying that the disloyal acts had no
effect on the shareholders—no causal relation to their loss.
An alternative mode of rebuttal would be to prove
that despite evidence of disloyalty, the directors had
been loyal; and then the business-judgment rule would
spring back in and insulate the directors from liability.
The term “entire fairness” makes a better semantic
14 No. 10-1953
match with this form of rebuttal than does showing that
the company was sold for the highest price realistically
attainable even if the directors who engineered the sale
were disloyal. But what would be the need for a concept
of “entire fairness” if all that was involved was that
if the plaintiff’s evidence of disloyalty is compelling
enough to place a burden of proving loyalty on the de-
fendant, the latter still can prevail, by proving that he
was loyal after all? The alternative version of “entire
fairness,” which defines a distinct doctrine, is the version
applicable to this case. The disloyalty of the defendant
directors must be assumed because the judge aborted
the trial, and so the defendants have to prove that their
misconduct had no causal efficacy because Cadant
made as good a deal as it would have done had the defen-
dants been loyal. That’s a simple causal question; there’s
no need to worry about what “proximate cause” means.
The defendants think it heresy to excuse a plaintiff
from having to prove causation and to make them prove
its absence. But not only is this unambiguously the Dela-
ware rule in a case like this; shifting to the defendant
the burden of proof on causation is common in other
areas of law, such as employment discrimination. E.g.,
St. Mary’s Honor Center v. Hicks, 509 U.S. 502, 506-07
(1993); Gacek v. American Airlines, Inc., 614 F.3d 298, 301 (7th
Cir. 2010). The shift makes sense in cases governed by
the business-judgment rule, which creates such a com-
modious safe harbor for directors that overcoming it
requires the plaintiff to make a very strong showing
of misconduct. Misconduct however great can be
rendered harmless by a supervening event such as the
No. 10-1953 15
bursting of a commodity bubble, as in Movitz. But as that
is exceptional, it makes sense to place the burden of
proving supervening cause on the defendant; indeed
that is where the burden of proving supervening cause
(a cause that wipes out the defendant’s responsibility
for the plaintiff’s injury) usually rests. E.g., BCS Services,
Inc. v. Heartwood 88, LLC, No. 10-3062, 2011 WL _____, at
*__ (7th Cir. March 24, 2011); Roberts v. Printup, 595 F.3d
1181, 1189-90 (10th Cir. 2010).
Actually there’s enough proof that the alleged miscon-
duct caused loss to Cadant’s shareholders to make the
issue of causation one for the jury no matter which side
has the burden of proof. It was after the dot-com
bubble burst, and only a few months before Cadant was
sold to the Arris Group for $55 million, that a similar
company, River Delta, was sold for $300 million. Cadant
couldn’t hold out for a comparable deal because of the
terms of the bridge loans. If the plaintiff’s evidence is
credited, Copeland, in cahoots with an employee of J.P.
Morgan named Charles Walker (a defendant), used
information gleaned from meetings of Cadant’s board to
reveal to J.P. Morgan and through it to Venrock that
Cadant would accept a smaller bridge loan, and for a
shorter term, than Venrock and J.P. Morgan would have
expected the board to insist on. Walker himself joined
Cadant’s board soon after the first bridge loan was
made, as did another J.P. Morgan employee (Stephan
Oppenheimer), who is also a defendant. There is
evidence that Copeland, Walker, and Oppenheimer
conspired to ensure that Cadant would accept the
second bridge loan, which added to the disadvantages to
16 No. 10-1953
Cadant of the first loan by creating a generous liquida-
tion preference; as mentioned earlier, in the event of a
sale or liquidation of Cadant, Venrock and J.P. Morgan
would be entitled to be paid twice the amount of their
investment in the company, to the prejudice of the
common shareholders.
The smaller the loan, the shorter the term, and the
bigger the liquidation preference, the worse for those
shareholders. The smaller the loan, the less it strengthens
the borrower (Cadant) and thus the harder it is for the
borrower to hold out for generous offers from prospec-
tive buyers. The shorter the term, the shorter the period
for which the borrower can hold out for an attractive
sale price. The bigger the liquidation preference, the
less the stockholders will realize from the sale in the
event—which was looming when the bridge loans were
made, and which eventually came to pass—that the firm
is forced to liquidate. Uncontaminated by disloyal direc-
tors, so far as appears, River Delta, in adverse economic
conditions similar to those alleged to have beset Cadant,
nevertheless was sold for more than five times what
Cadant was sold for a few months later. This is some
evidence—and not the only evidence (but we’re trying
to keep this opinion as short as possible)—that Cadant’s
common shareholders were hurt by the defendants’
misconduct, over and above the hurt inflicted by events
over which the defendants had no control. Remember
that the trial was bifurcated, so that all the jury had to
find was that Cadant had been harmed by the directors’
actions; measurement of the harm—specifically, allocating
the harm between the misconduct of the defendants
No. 10-1953 17
and the bursting of the dot-com bubble—was reserved
for the trial on damages, if liability was found.
Even so, the defendants argue, retreating to their
second line of defense, there was no breach of loyalty
because their conflict of interest was fully disclosed. The
conflict was fully disclosed. But that misses the point.
Section 144(a)(1) of Delaware’s General Corporation
Law provides, so far as relates to this case, that if “the
material facts as to the director’s . . . relationship or interest
and as to the contract or transactions are disclosed or
are known to the board of directors . . ., and the
board . . . in good faith authorizes the contract or transac-
tion by the affirmative votes of a majority of the disin-
terested directors,” then “no contract” between the corpo-
ration (call it A) and another corporation (B) in which a
director of A is also a director or an officer, or has
some other financial interest, “shall be void or voidable
solely for this reason,” that is, solely because a director
of A has an interest in B, with which A transacted. Cope-
land was a director of Venrock as well as of Cadant, and
Venrock was a lender to Cadant, both as a preferred
shareholder (which is a type of lender, not an equity
owner) and as a bridge lender. The other defendant
directors had a similar conflict of interest. But Copeland
(and we may assume the others) fully disclosed to
Cadant his (their) relationship with Venrock or J.P. Mor-
gan, the other preferred shareholder-bridge lender,
which was acting in partnership with Venrock. This meant
that the transactions between it and Venrock and J.P.
Morgan, disadvantageous to Cadant though they turned
18 No. 10-1953
out to be, could not be voided solely because of the con-
flicts of interest. And if the conflicts thus were sterilized,
the directors could not be found to have committed a
breach of fiduciary duty just by virtue of the fact that
they negotiated those deals.
But that is not the accusation. The accusation is that
the directors were disloyal. They persuaded the district
judge that disclosure of a conflict of interest excuses a
breach of fiduciary duty. It does not. It just excuses the
conflict. (Notice the parallel between the statutory pro-
vision and how Delaware law treats the exculpatory
clause in Cadant’s articles of incorporation.) Mills Acquisi-
tion Co. v. Macmillan, Inc., 559 A.2d 1261, 1279-80
(Del. 1989); Off v. Ross, 2008 WL 5053448, at *11 n. 43 (Del.
Ch. Nov. 26, 2008); Kosseff v. Ciocia, 2006 WL 2337593, at *6-
8 (Del. Ch. Aug. 3, 2006); cf. Kahn v. Lynch Communications
Systems, Inc., 638 A.2d 1110, 1117-21 (Del. 1994); Weinberger
v. UOP, Inc. 457 A.2d 701, 703 (Del. 1983).
To have a conflict and to be motivated by it to breach
a duty of loyalty are two different things—the first a
factor increasing the likelihood of a wrong, the second
the wrong itself. Thus a disloyal act is actionable even
when a conflict of interest is not—one difference being
that the conflict is disclosed, the disloyal act is not. A
director may tell his fellow directors that he has a
conflict of interest but that he will not allow it to
influence his actions as director; he will not tell them he
plans to screw them. If having been informed of the
conflict the disinterested directors decide to continue to
trust and rely on the interested ones, it is because they
No. 10-1953 19
think that despite the conflict of interest those directors
will continue to serve the corporation loyally.
Benihana of Tokyo, Inc. v. Benihana, Inc., 906 A.2d 114 (Del.
2006), a derivative suit much like this one, provides an
illuminating contrast to this case. A director was inter-
ested but his interest was known to the board.
Having settled that point, the court went on to con-
sider whether he had breached his fiduciary duty to the
corporation, and concluded that he had not. He “did not
set the terms of the [challenged] deal; he did not
deceive the board; and he did not dominate or control
the other directors’ approval of the Transaction. In
short, the record does not support the claim that [he]
breached his duty of loyalty.” Id. at 121. There is
enough evidence that Copeland and the other defendant
directors did these things to create an issue for a jury
to resolve.
Only one further issue need be discussed—the potential
liability of Venrock and J.P. Morgan. They of course
owed no duty of loyalty or care to Cadant. But to aid and
abet a breach of fiduciary duty committed by corporate
directors is actionable under Delaware law, Gatz v.
Ponsoldt, 925 A.2d 1265, 1275-76 (Del. 2007); Malpiede
v. Townson, 780 A.2d 1075, 1096-98 (Del. 2001); Gilbert v. El
Paso Co., 490 A.2d 1050, 1057-58 (Del. 1984), and the
evidence of such aiding and abetting, notably by Charles
Walker on behalf of both Venrock and his employer J.P.
Morgan, is sufficient to create another jury issue. Gatz
explains that “to state a claim for aiding and abetting a
breach of fiduciary duty, a plaintiff must allege (1) a
20 No. 10-1953
fiduciary relationship; (2) a breach of that relationship;
(3) that the alleged aider and abettor knowingly partici-
pated in the fiduciary’s breach of duty; and (4) damages
proximately caused by the breach,” 925 A.2d at 1275, and
Malpiede that “a third party may be liable for aiding
and abetting a breach of a corporate fiduciary’s duty
to the stockholders if the third party ‘knowingly partici-
pates’ in the breach . . . . Knowing participation in a
board’s fiduciary breach requires that the third party
act with the knowledge that the conduct advocated or
assisted constitutes such a breach. Under this standard,
a bidder’s attempts to reduce the sale price through arm’s-
length negotiations cannot give rise to liability for
aiding and abetting, whereas a bidder may be liable to
the target’s stockholders if the bidder attempts to create
or exploit conflicts of interest in the board,” 780 A.2d at
1096-97, and Gilbert that “although an offeror may
attempt to obtain the lowest possible price for stock
through arm’s-length negotiations with the target’s
board, it may not knowingly participate in the target
board’s breach of fiduciary duty by extracting terms
which require the opposite party to prefer its interests
at the expense of its shareholders.” 490 A.2d at 1058.
These formulas, with “lender” replacing “bidder” in
Malpiede and “offeror” in Gilbert, fit this case to a T (always
assuming that the plaintiff can prove his allegations).
These defendants will of course avoid liability for
aiding and abetting if there was no misconduct by Cope-
land or any of the other defendant directors for Venrock
and J.P. Morgan to aid or abet, but we have just ruled
that there was sufficient evidence of such misconduct
to create a jury issue.
No. 10-1953 21
The defendants make some other arguments in
support of the judgment, but they are too insubstantial to
warrant discussion. The plaintiffs’ objections to certain
evidentiary rulings by the district court during the trial
can abide the retrial.
We note the questionable wisdom of granting a
motion for judgment of law seven weeks into a trial that
was about to end because the defendants declared that
they were not going to put in a defense case. Reserving
decision on the motion might have avoided a great
waste of time, money, and judicial resources, as the
case must now be retried from the beginning.
And because it will be retried Circuit Rule 36 directs
that a new judge be assigned unless the parties stipulate
otherwise. Either way the parties and the district court
may want to rethink how the case should be submitted
to the jury. The original trial was bifurcated along tradi-
tional lines, separating liability from damages, and with
regard to liability for breach of fiduciary duty the
proposed jury instructions required the plaintiff
to prove duty, breach, causation, and injury. But the
burden-shifting structure of the relevant Delaware
law—normally applied by Chancery judges—can be
difficult for lay jurors to grasp. Although rebutting the
application of the business-judgment rule is similar to
proving duty and breach, and proving “entire fairness”
is similar to disproving causation and injury, the
concepts are not identical. When compensatory damages
are sought, proving or disproving that the challenged
transaction was made at a “fair price” (evidencing “entire
22 No. 10-1953
fairness”) might require the same evidence as proving
or disproving damages. It may therefore make sense to
reconsider on remand whether bifurcating liability and
damages is the best approach to take in this case. Bifurca-
tion tailored to the requirements of Delaware law might
make the jury’s job easier. One possibility would be
for phase one of a bifurcated trial to focus on the plain-
tiff’s evidence in support of rebutting application of the
business-judgment rule and phase two to take up the
question of “entire fairness” and, if necessary, damages.
But this is a case-management issue, which was not
addressed by the parties and is best left to the judgment
of the district judge who will retry the case.
R EVERSED AND R EMANDED,
WITH D IRECTIONS
3-29-11