"Reckless" conduct deemed "gross negligence" instead of "bad faith" under Delaware law

On Aug 29, 2008, Chancellor William B. Chandler III of the Delaware Court of Chancery issued his decision in McPadden v. Sidhu, in which he dismissed claims brought against directors who approved the sale of a wholly-owned subsidiary to a company officer. Despite concluding that the allegations established that the directors had acted recklessly, the Chancellor held that the complaint did not state a claim for action in bad faith. As a result, the directors were exculpated from liability under Section 102(b)(7) of the Delaware General Corporation Law, and the complaint against them was dismissed. The McPadden litigation arose out of the sale by i2 Technologies Inc of its wholly-owned subsidiary, Trade Services Corp, to Anthony Dubreville, an i2 officer. Procedurally, McPadden is significant because Chancellor Chandler declined to consider the implications of a Section 102(b)(7) provision when determining whether demand was excused under Rule 23.1. Under Rule 23.1, the core question is whether a board of directors can properly consider a demand.