MEMORANDUM OPINION

GLASSCOCK, Vice Chancellor.

The duty of loyalty under which a corporate director must act is exacting, but narrow. That duty, properly understood, allows directors wide latitude to take action and embrace risk for the benefit of the corporation. The exacting constraints include that such action must be in the interest of the corporation and its owners, the stockholders; the duty prohibits actions for the benefit of the director herself, or others to whom she is beholden, absent entire fairness to the corporation. That is the most straightforward part of the loyalty obligation.

The duty of loyalty also requires that disinterested, independent directors act in good faith. The good-faith corollary to the duty of loyalty is something of a catch-all. Good faith—the absence of actions taken in bad faith—prohibits board action intended for purposes other than corporate weal, even though taken by independent, disinterested directors.1 Intentional dereliction of duty, "inaction in the face of a duty to act," may also constitute bad faith.2 Chancellor Chandler has described the application of bad-faith analysis, appropriately in my view, as "hazy jurisprudence."3 To my mind, one part of the good-faith component of the duty of loyalty allows the equity judge something akin to a "fiduciary out" from the business judgment rule, for situations where, even though there is no indication of conflicted interests or lack of independence on the part of the directors, the nature of their action can in no way be understood as in the corporate interest: res ipsa loquitur. Thus conceived, bad faith is similar to the much older fiduciary prohibition of waste, and like waste, is a rara avis. This matter involves the Plaintiffs' unsuccessful pursuit of that rare bird.

This matter is before me on Defendants' Motion to Dismiss the Plaintiffs' Second Verified Consolidated Amended Complaint (the "Second Amended Complaint"). Plaintiffs Joseph Hetland, Robert Countryman, and Richard Rotundo are representative stockholders of Chelsea Therapeutics International, Ltd. ("Chelsea" or the "Company"), a developmental biopharmaceutical company, which has researched and developed a drug called NORTHERA™ ("Northera") to treat symptomatic neurogenic orthostatic hypotension ("NOH").4 The Defendants— Joseph G. Oliveto, Kevan Clemens, William D. Rueckert, Roger Stoll, and Michael Weiser—are members of the Chelsea Board of Directors (the "Board").

The Plaintiffs bring this class action, alleging breaches of fiduciary duty against the Defendants in connection with the sale of Chelsea to Lundbeck A/S ("Lundbeck") through a tender offer and short-form merger (the "Transaction"). The Plaintiffs contend that the Defendants knowingly sold the Company for an amount substantially below its standalone value, and, in furtherance of that disloyal act, improperly instructed Chelsea's financial advisors to ignore one set of financial projections of the Company, which assume a higher market share for the Company if the FDA were to remove the Company's primary competitor from the market; and also chose themselves to disregard a second set of projections, which predict increased revenue streams to the Company should the FDA, in the future, approve Northera for the treatment of other medical conditions for which its use is currently neither proven effective nor approved. The Plaintiffs contend that the Defendants intentionally concealed the true, higher value of the Company from its stockholders, and also raise several other issues regarding the sales process and terms of the Transaction, most of which have since been waived.5

As clarified at oral argument on Defendants' Motion to Dismiss, the Plaintiffs proceed here on a narrow bad-faith claim—that the Board acted in bad faith by instructing its financial advisors to ignore one set of projections in opining on the fairness of the Transaction, and by choosing to disregard a second set of projections before recommending the Transaction to Chelsea's stockholders.6 The Plaintiffs argue that these actions led to the under-valuation of the Company, and are inconceivable as anything other than actions against the interests of the stockholders, maximizing value for whom was, at that point, the only proper purpose of the Board. Thus, despite the independent and disinterested nature of the Board, the directors must have acted in bad faith. The Defendants moved to dismiss for failure to state a claim under Court of Chancery Rule 12(b)(6); for the following reasons, I grant the Defendants' motion. I. BACKGROUND7

Because any process claims relating to the Transaction have been abandoned, I include only a brief recitation of the facts pertinent to the narrow question before me now.

A. Chelsea's Standalone Prospects

In February 2014, the United States Food and Drug Administration ("FDA") granted accelerated approval of Northera to treat NOH.8 Northera was given "orphan" drug status, which designation carries with it certain development incentives, "including [seven-year] market exclusivity, tax credits, enhanced patent protection, and clinical research subsidies."9 The Plaintiffs contend that, following Northera's FDA approval, the Company held significant standalone value from Northera's limited competition on the market and its hypothetical future applications to treat other conditions.

1. Northera's Limited Competition: The "No-Midodrine Projections"

Northera's primary competitor is a drug called Midodrine.10 In September 2010, the FDA gave notice that it intended to take Midodrine off the market, due to its side effects and ineffectiveness.11 After this announcement was met with public outcry from patients and physicians alike, however, the FDA changed course and allowed Midodrine's producer to continue marketing Midodrine while conducting testing to seek final approval of the drug.12 The Plaintiffs contend that, although final approval of Midodrine is still possible, neither its producer nor the FDA have any incentive to pursue that outcome, as Midodrine is a generic drug with little impact on its producer's total earnings.13 Moreover, the Plaintiffs contend that, even if Midodrine remains on the market indefinitely, Northera stands to gain substantial market share as the superior drug.14

The Chelsea Board has recognized the possibility of Midodrine's removal from the market, and the potential for resulting upside for Chelsea, since at least February 2011;15 it has consistently prepared financial projections that estimate an increase of 16% in Northera's market share should Midodrine be removed from the market (the "No-Midodrine Projections").16

2. Additional Applications of Northera: The "L.E.K. Study"

Following the FDA's 2014 approval of Northera, the Chelsea Board commissioned a study prepared by L.E.K. Consulting (the "L.E.K. Study") to predict potential revenue streams that would result if the FDA should approve additional applications of Northera for treatment of conditions other than NOH, including freezing of the gait, intradialytic hypertension, attention deficit hyperactivity disorder, and fibromyalgia.17 In conducting its analysis, L.E.K. Consulting interviewed physicians and assessed secondary research and analytics, ultimately concluding, without adjusting for risk, that "Northera's additional applications could represent $860 million in revenue potential in 2030."18

B. The Lundbeck Transaction

Prior to achieving FDA approval, Chelsea had engaged Torreya Capital ("Torreya") to conduct a strategic review evaluating potential transactions.19 Through this process, Torreya contacted 65 companies during 2013, but none of the companies submitted either an informal or formal proposal to Chelsea.20 Owing to a potential conflict on the part of Torreya, the Company later retained Deutsche Bank as a second financial advisor.21

Following Northera's FDA approval, several potential buyers expressed renewed interest in acquiring the Company.22 On March 31, 2014, Lundbeck submitted a bid to acquire Chelsea for $6.44 per share in cash.23 The Board met to consider the offer on April 3, 2014.24 During that meeting, the Board considered analyses, prepared by Deutsche Bank, concerning Chelsea's standalone value, including a discounted-cash-flow analysis that indicated that Chelsea could be worth $11.32 to $15.02 per share if Midodrine was removed from the market.25 After weighing the offer against Chelsea's standalone value, the Board instructed its financial advisors to inform Lundbeck that its offer was insufficient.26 Lundbeck responded with a revised offer on April 11, 2014, maintaining its offer of $6.44 per share cash, and sweetening the deal by adding potentially lucrative contingent value rights ("CVRs") to Chelsea stockholders based on the Company achieving certain future sales targets.27 The enhanced offer represented a price premium of around 30%, to as much as 60%, if the CVRs returned maximum value.28

At the time Lundbeck made its revised offer, the Board had been reviewing and relying upon various financial models for the Company, which the Plaintiffs label the "Base Case, the Adjusted Base Case, and the No-Midodrine Projections."29 The first assumes only one possible application for Northera (the treatment of symptomatic NOH); the second makes this same assumption, but reflects a higher level of net sales owing to an increase in the size of Chelsea's sales force; and the third, as described above, adjusts the Base Case to assume an increased market share for Northera following the hypothetical removal of Midodrine from the market.30 None of these three financial models reflects the results of the L.E.K. Study—that is, potential revenue streams resulting from hypothetical new applications of Northera.

The Plaintiffs contend that, when faced with the Lundbeck offer, rather than resting on Chelsea's strong standalone value, the Board directed Deutsche Bank to exclude the No-Midodrine Projections from further consideration.31 The Board did this, the Plaintiffs contend, even though it "did not dispute the reasonableness of the assumptions in the No-Midodrine Projections, nor any of the individual forecasts,"32 and with a "single purpose: to allow Deutsche Bank [to] prepare a fairness opinion for the Board that could act as window dressing for a knowingly unfair price."33 Just over a month after Lundbeck's initial offer, the Board agreed to sell Chelsea to Lundbeck for $6.44 per share and CVRs of up to an additional $1.50 per share if certain annual sales targets are met between 2015 and 2017.34 The Lundbeck Transaction, according to the Plaintiffs, undervalues the Company by between $266 million and $558 million.35

The Plaintiffs also allege disclosure deficiencies in Chelsea's May 2014 14D-9 issued in connection with the Transaction.36 As clarified at oral argument, the Plaintiffs' objection is limited to the omission of the No-Midodrine Projections and the results of the L.E.K. Study (collectively, the "Projections") from the 14D-9, after the Board had already shared that information with potential buyers—including Lundbeck—as part of the due diligence process.37 I note, however, that while the Company did not disclose to stockholders the substance (including the implications to value) of the No-Midodrine Projections, it did disclose that the Board had considered the No-Midodrine Projections, ultimately concluding that they were too speculative to be quantifiable, and that it had instructed Deutsche Bank not to take them into account in preparing its financial analysis.38

Finally, the Plaintiffs allege that the Board, unlike Chelsea stockholders, were able to "recoup" a portion of the value lost by selling the Company at too low a price because the Defendants were, collectively, entitled to receive over $3 million in special change-of-control payments as a result of the deal.39 If a sale closed by the end of 2014 (through a "sales event" under the Company's Executive Retention Bonus Plan), Oliveto and other senior executives stood to receive a bonus of 50% of their base salary, and each of the Company's four non-executive Board members would receive a bonus of 50% of the cash compensation paid to each director in 2013.40 Additionally, the Plaintiffs allege that, because Lundbeck expected to retain Chelsea's senior management following the Transaction, management had the opportunity—unlike Chelsea stockholders—to participate in any future upside of the Company through future equity awards and performance-based compensation.41

C. Procedural Posture

The Plaintiffs filed their initial Verified Class Action Complaint on May 9, 2014, alleging breaches of fiduciary duty by the Defendants in connection with the Transaction for failing to sufficiently inform themselves of, or disregarding, Chelsea's standalone value; and for agreeing to a sale of the Company at an unfair price. The Plaintiffs filed a Verified Amended Consolidated Class Action Complaint (the "First Amended Complaint"), a motion to expedite, and a motion for a preliminary injunction on May 30, 2014. After full briefing and argument on the motions, then-Vice Chancellor Parsons denied the Plaintiffs' motion for a preliminary injunction on June 18, 2014.42 The tender offer closed on June 20, 2014. Nearly one year later, the Plaintiffs filed a Second Verified Consolidated Amended Complaint on June 16, 2015. The Defendants moved to dismiss the Second Amended Complaint, and the parties completed full briefing of the motion (the "Motion"). With respect to the matters presented on the Motion, the First and Second Amended Complaints are substantively the same. The case was then reassigned to me, due to Vice Chancellor Parsons's retirement, and I heard argument on the Motion on February 19, 2016.

II. ANALYSIS

The Defendants have moved to dismiss the Second Amended Complaint under Court of Chancery Rule 12(b)(6) on the ground that the Plaintiffs fail to state a claim upon which relief may be granted. Under this rule, I must accept the allegations of the Second Amended Complaint as true, drawing all reasonable inferences therefrom, and dismiss only if the Plaintiffs "would not be entitled to recover under any reasonably conceivable set of circumstances."43

A. The Disclosure Claims

To the extent post-closing damages claims based on allegedly inadequate disclosures remain, they involve failure to disclose the Projections. Then-Vice Chancellor Parsons rejected Plaintiffs' motion for a preliminary injunction based on these same disclosure claims from the bench following a hearing. In connection with his denial of the preliminary injunction (under the standard applicable there),44 the Vice Chancellor made findings of fact in his decision (the "Bench Decision"), based on the allegations of the First Amended Complaint. With respect to the L.E.K. Study, the Vice Chancellor found that

With respect to the No-Midodrine Projections, the Vice Chancellor noted that

At oral argument on Defendants' Motion, the Plaintiffs conceded to the Court that nothing new with respect to these disclosure claims has come to light or been pled since the preliminary-injunction hearing.47 Therefore, for the cogent reasons set forth in the Bench Decision (including those parts not quoted above), I find that the Plaintiffs have failed to allege disclosure violations concerning the Transaction sufficient to be actionable. The Plaintiffs at oral argument did not argue convincingly to the contrary.48 They do argue that they should be able to pursue a claim that—independent of any claims regarding inadequate disclosures—the Board's decision to ignore value implied by the Projections was made in bad faith.

B. The Bad-Faith Claim

Given that this matter is before me in the posture of a post-closing damages suit, and because I have found no disclosure violations, the Defendants urge me to extend to this case the rule established by the Delaware Supreme Court in Corwin v. KKR Financial Holdings LLC49—that is, they argue that should I should make a finding that the disclosures were adequate to cleanse any bad faith on the part of the directors and that, under the business judgment rule, I should thus dismiss the action.50 The Plaintiffs disagree; and I note that the Board failed to disclose what the Plaintiffs allege was the Board's bad-faith decision to disregard value implied by the Projections. It is unclear that the rule in Corwin, in any event, would cleanse a bad-faith act, even if disclosed. I need not resolve this issue, however, because the Second Amended Complaint fails to state a claim in any event.51 The Defendants here are exculpated from duty-of-care claims under Section 102(b)(7),52 and the Plaintiffs have not articulated a claim for breach of the duty of loyalty, beyond the narrow bad-faith claim just referred to. For the reasons below, I find the facts alleged insufficient to support this claim.

The crux of Plaintiffs' argument centers on the decision by the Board, against the backdrop of an offer from Lundbeck, to direct its financial advisors to opine on the fairness of the Transaction without considering value implied by the No-Midodrine Projections, and to recommend the Transaction without considering, or directing its financial advisors to consider, the L.E.K. Study. As described above, the first of the Projections, the No-Midodrine Projection, estimates the potential increase in Northera's market share in the event that the FDA removes Northera's primary competitor, Midodrine, from the market. The second, the L.E.K. Study, projects profits in 2030, more than 15 years out from the time of the study, if Northera were hypothetically approved by the FDA for treatment of other conditions, for which its use is currently prohibited, and implies a value without adjusting for risk. The Plaintiffs contend that excluding the Projections from consideration by the financial advisors allowed the advisors to find the Transaction fair when in fact it was not, allowed the directors to recommend an inadequate sales price, and constituted faithless acts on the part of the directors.

As this Court explained in Dent v. Ramtron International Corp.,53 to state a bad-faith claim, a plaintiff must show either "an `extreme set of facts'" to establish that "`disinterested directors were intentionally disregarding their duties,'" or that "the decision under attack is so far beyond the bounds of reasonable judgment that it seems essentially inexplicable on any ground other than bad faith."54 The Plaintiffs do not contend that the Defendants are not entitled to business-judgement protection because they are conflicted in the Transaction. In fact, they concede that the Defendants held equity positions, which aligned their interests—maximum value—with the other stockholders. Nonetheless, the Plaintiffs point to "change-in-control" payments to which the Defendants were entitled should the Company be sold.55 The Plaintiffs point out that these payments, not available to the other stockholders, allowed the Defendants to recoup (at least in part) the loss to them engendered by the allegedly faithless exclusion of the Projections. Of course, if there were a well-pleaded allegation that the change-in-control payments exceeded, in a way material to the Defendants, the loss engendered by an intentional under-valuation of the Company in aid of the Transaction, a loyalty breach would have been pled. Here, however, the failure to allege that the change-in-control payments were even sufficient to overcome the alleged loss does not support a finding of bad faith.56

Thus, the Plaintiffs are left to rely on the most difficult path to overcome dismissal of a claim based on bad faith: that the action complained of is otherwise inexplicable, so that bad faith—a motive other than the interest of the Company—must be at work. The question before me is, simply, was the Chelsea Board's decision to exclude the Projections so egregious on its face that—notwithstanding that there are no allegations that the directors are interested or lack independence—the Plaintiffs have stated a case that it is reasonably conceivable that the Defendants acted in bad faith?

Here, the answer is no. I find that it is not without the bounds of reason—in fact, it is readily explicable—that the Board would decline to use the Projections to value the Company, as both are highly speculative. The first, the No-Midodrine Projections, reflect an increased market share for Northera should Midodrine be taken off the market. As the Company had indicated for several years in its 14D-9 statements, however, the Board had no assurances that Midodrine would ever be discontinued.57 As Vice Chancellor Parsons found in the Bench Decision, the Board considered this issue in the context of the Transaction and found it unlikely that the FDA would pull Midodrine from the market. The second set of projections, the L.E.K. Study, only estimates potential revenue streams that could occur, over fifteen years later, without adjusting for risk. In order for the projections in the L.E.K. Study to be fulfilled, Northera would have to both be proven capable of treating additional conditions and be approved by the FDA for those uses. As with the No-Midodrine Projections, the Company has disclosed for years in public filings the other potential applications of Northera.58 I note that the Projections were made available to potential buyers approached by the financial advisers touting the sale of the Company.59 The Defendants argue, and I agree, that if the Projections were a realistic indication that the Company's value was hundreds of millions of dollars higher than Lundbeck's offer, another bidder likely would have emerged throughout the 20-month long sales process. The Plaintiffs argue, and it is no doubt conceivable, that reasons exist which might have made it wise for the Board to include the Projections in the Company's valuation. This disagreement with the actions of the Board does not plead a case of bad faith, however. The Plaintiffs have failed to plead facts that demonstrate that the Defendants' decision to disregard the Projections in recommending the Transaction was so egregious that it is reasonably conceivable the Defendants acted in bad faith.

The Board, after deliberation and in consideration of the sale of the Company, instructed its advisors not to consider projections that its assets would increase in value, years in the future, on speculation that the FDA would approve one of its products for currently-prohibited uses, or would remove a competing drug from the market altogether. Both sets of projections involved contingencies over which the Company had no control, and which might never come to pass. The Board itself decided not to consider these projections in recommending the Transaction to the stockholders. Such actions do not, on their face, plead a conceivable breach of the Directors loyalty-based duty to act in good faith. No other grounds conceivably leading to a finding of bad faith are pled.

III. CONCLUSION

For the foregoing reasons, Defendants' Motion to Dismiss is granted. An appropriate order accompanies this Memorandum Opinion.

ORDER

AND NOW, this 20th day of May, 2016,

The Court having considered Defendants' Motion to Dismiss, and for the reasons set forth in the Memorandum Opinion dated May 20, 2016, IT IS HEREBY ORDERED that Defendants' Motion to Dismiss is GRANTED.

SO ORDERED.