Posts in Caremark Claims

Court of Chancery Dismisses Derivative Claims Under Rule 23.1 When Plaintiff Failed to Show that Board Members Faced a Substantial Risk of Liability in Failing to Prevent Personal Use of Company Property

Conte v. Greenberg, C.A. No. 2022-0633-MTZ (Del. Ch. Feb. 2, 2024)
In examining whether a pre-suit demand upon the board of directors would be futile, the Court will examine on a director-by-director basis (i) whether the director received a material personal benefit from the alleged misconduct that is the subject of the litigation demand, (ii) whether the director faces a substantial likelihood of liability on any of the claims that would be the subject of the litigation demand, and (iii) whether the director lacks independence from someone who received a material personal benefit from the alleged misconduct that is the subject of the litigation demand or faces a substantial likelihood of liability on any of the claims that would be the subject of the litigation demand. In this case, the plaintiff alleged that the board faced a substantial risk of liability for failing to impose meaningful restrictions on certain executives’ alleged personal use of corporate airplanes, and also for issuing misleading disclosures. The Court disagreed, however, reasoning that even if directors failed to prevent the personal use of the airplane, that alone did not amount to bad faith, because the risk was contained. The Court reasoned the plaintiff’s claim related solely to the “misuse of two corporate assets by discrete individuals, as compared to a widespread operational deficiency.” Furthermore, the Court held that the directors were not at a substantial risk of liability for disclosure claims, because the proxy statement disclosed that certain executives had used the plane for personal use, and the failure to include the several details or characterizations upon which the plaintiff insisted were not material omissions in the context of the proxy statement. The Court accordingly granted the defendants’ motion to dismiss for failure to plead demand futility. 

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Chancery Reasons That Board’s Decision To Address Alleged “Red Flags” Related To Pending Litigation, After Litigation Is Resolved, Is Not Bad Faith For Caremark Purposes

Pettry v. Smith et al., C.A. No. 2019-0796-JRS (Del. Ch. June 28, 2021)
As discussed in Caremark and its progeny, fiduciary duties require directors to monitor the business and affairs of a corporation. Here, the Court of Chancery addressed the issue of oversight liability in the context of a Board’s decision, despite “red flags,” to delay certain additional remedial actions pending resolution of directly related litigation. More ›

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Chancery Compares Aronson and Rales Tests for Demand Futility; Finds Well-Pled Caremark Claim Showing No Good Faith Effort to Oversee Financial Reporting and Related-Party Transactions Made Demand Futile

Hughes v. Hu, C.A. No. 2019-0112-JTL (Del. Ch. Apr. 27, 2020).

Everyone from bar applicants to seasoned litigators and counsel advising boards of directors can find something of interest in Hughes v. Hu, which (i) provides a comprehensive review of how the Court of Chancery evaluates demand futility in derivative actions and (ii) discusses the type of allegations that will support a well-pled Caremark claim for failure to take affirmative steps to ensure an effective board-level monitoring reporting system is in place. More ›

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