a. Why did Loudeye include an exculpatory clause in its charter?

b. Does this benefit anyone other than the director?

c. Does cumulative voting favor management or shareholders?

d. Why did Gulf Oil have cumulative voting?

Loudeye Corporation provided digital music for cell phones and other consumer electronics. Loudeye was headquartered in Seattle, Washington, but incorporated in Delaware. As is permitted under Delaware law, Loudeye had an exculpatory clause in its charter protecting directors from liability. Washington corporate law would not enforce such a clause.

Loudeye's directors decided to sell the company because it was not generating enough revenue to compete. At the time, the market price for the company was $1.66 per share. Nokia offered to pay $4.50 per share and Loudeye counter offered at $5.00, which Nokia rejected. After two other companies submitted lower offers, Loudeye's board voted to accept Nokia's bid.

Eli Rodriguez, a Loudeye shareholder, sued claiming the directors had breached their fiduciary duties by failing to obtain the best price, and that the board had conflicts of interest and had approved the sale because they would receive special financial benefits (such as severance payments and stock options).

The Loudeye directors filed a motion to dismiss alleging the exculpatory clause in the company's charter protected the directors from liability. Rodriguez argued that Washington law should apply, and even if the exculpatory clause were valid, it did not apply in this case. The trial court granted the motion to dismiss.