This post reviews two recent Delaware Supreme Court opinions that reexamine the standards governing the ability of stockholders to pursue derivative claims in the name of the company against corporate directors and officers, as well as several recent decisions from the Delaware Chancery Court that continue to explore the contours of “Caremark claims” brought against corporate boards for failure of the duty of oversight in connection with negative corporate events.
In Brookfield Asset Management, Inc. v. Rosson, 2021 WL 4260639 (Del. Sept. 20, 2021), the Delaware Supreme Court overruled the concept of “dual” claims established by Gentile v. Rossette—i.e., situations where there could be both direct claims litigable by stockholders and derivative claims subject to control of the company’s board, and in UFCW Union & Participating Food Industry Employers Tri-State Pension Fund v. Zuckerberg, 2021 WL 4344361 (Del. Sept. 23, 2021), the Supreme Court articulated a refined test for the pleading of “demand futility”— typically the threshold test before a shareholder can take control of a derivative claim.
The Delaware Court of Chancery has also recently issued several opinions concerning claims that boards failed to oversee company operations under standard established by In re Caremark International Inc. Derivative Litigation, 698 A.2d 959 (Del. Ch. 1996) (“Caremark claims”). While oversight liability under Caremark is “possibly the most difficult theory in corporation law upon which a plaintiff might hope to win a judgment,” these recent developments show that while the theory presents obstacles they are not insurmountable. This area has been closely watched since the Delaware Supreme Court’s 2019 decision in Marchand v. Barnhill, 212 A.3d 805 (Del. 2019), which allowed a Caremark claim to proceed against Blue Bell Creameries’ board related to a listeria outbreak resulting in three customer deaths. In Firemen’s Retirement System of St. Louis v. Sorenson, 2021 WL 4593777 (Del. Ch. Oct. 5, 2021), Vice Chancellor Lori Will dismissed a derivative case related to a cybersecurity breach of hotel customer data, holding that none of the current board members faced a substantial likelihood of liability for a non-exculpated claim. By contrast, in In re The Boeing Co. Derivative Litigation, 2021 WL 4059934 (Del. Ch. Sept. 7, 2021), Vice Chancellor Morgan Zurn denied motions to dismiss a derivative claim concerning Boeing’s directors’ oversight duties brought in the wake of two fatal plane crashes, finding that plaintiffs pled a substantial likelihood of liability for both failure to establish a reporting system for airplane safety and ignoring red flags related to airplane safety.
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