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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
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Showing 203 posts in Derivative Claims.
Court Of Chancery Explains Limits On Duty To Know
Marchland v. Barnhill, C.A. 2017-0586-JRS (September 27, 2018)
When something bad occurs in a business, it now seems inevitable that the directors may be sued. The most popular form of suit now seems to be a securities claim based on a failure to have disclosed the danger the entity faced that has now come home to do it harm. This decision shows why securities claims are in fashion for those events. For as it points out, there is not liability under Delaware corporate law for simply failing to prevent harm to the corporation. Something more is needed to show the directors acted in bad faith, such as a red flag warning of the need to act to prevent the harm. Thus, the decision dismissed a complaint that only alleged the directors did not do as much as might have been done to prevent the bad events from harming their entity.
ShareCourt of Chancery Clarifies Nature of Dilution Claims in Charter-Liberty Broadband Equity Issuance and Allows Derivative Challenge to Proceed
Sciabacucchi v. Liberty Broadband Corporation, C.A. No. 11418-VCG (Del. Ch. July 26, 2018)
This is the second notable decision arising out of litigation involving Charter Communication’s equity issuance to its largest stockholder, Liberty Broadband, in connection with other transactions. More ›
ShareDelaware District Court Stays Twitter Derivative Case Pending Securities Action
In re Twitter Inc. Shareholder Derivative Litigation, C.A. No. 18-62-VAC-MPT (D. Del. July 23, 2018)
Several Court of Chancery decisions discuss the appropriateness of staying a derivative action pending a related securities laws action. Doing so relieves a company from the tension of having to defend against allegations of wrongdoing carried out by its directors or officers while at the same time a stockholder is seeking to prove those same claims against its directors and officers on its behalf. A stay also has the advantage of allowing the existence and size of any damages to be firmly established. This is another decision to add to that line of authority.
ShareCourt of Chancery Requires Bad Faith Disclosure Violations for Demand Futility
Ellis v. Gonzalez, C.A. No. 2017-0342-SG (Del. Ch. July 10, 2018)
The pre-suit demand on the board requirement for derivative litigation usually is not excused solely by a sufficiently pled disclosure violation. Rather, as held in this decision and recently in Steinberg v. Bearden, 2018 WL 2434558 (Del. Ch. May 30, 2018), to excuse demand on an independent, disinterested, and duty-of-care-exculpated board on the basis that the directors face a substantial risk of liability for a disclosure violation, the complaint must sufficiently plead the disclosure violation was the product of bad faith. Absent sufficient non-conclusory facts on this point, the complaint will be dismissed.
ShareCourt Of Chancery Dismisses Derivative Complaint Alleging Disclosure Violations
Steinberg v. Bearden, C.A. No. 2017-0286-AGB (Del. Ch. May 30, 2018)
This is an interesting decision for its discussion of when pre-suit demand on the board is not excused for a derivative complaint alleging the directors made improper disclosures to stockholders. Applying the well-known Rales test for demand futility, the Court’s focus here was on the absence of particularized allegations from which it was reasonable to infer that a majority of the directors deliberately caused the corporation to issue certain allegedly misleading statements. When that is the case in a suit relying on a bad faith claim, the board doesn’t face a substantial threat of personal liability capable of excusing demand.
ShareCourt Of Chancery Explains When Directors Lack Independence To Consider Pre-Suit Demand
In Re Oracle Corporation Derivative Litigation, C.A. No. 2017-037-SG (Del. Ch. Mar. 19, 2018)
Delaware law requires a derivative plaintiff to make a pre-suit demand on the board unless excused as futile. Because some level of social and business ties are common among the director-class and because such ties to an interested party is one potential path to successfully alleging a director lacks independence to impartially consider a pre-suit demand, such relationships are an oft litigated topic in the demand context. Frequently, such connections even when considered collectively are found not to rise to a level negating a director’s ability to consider a demand. But, as this decision explains, sometimes they are. While each director-by-director assessment is a highly-factual question, this case is a worthwhile read to understand the type and magnitude of relationships that might call into doubt one’s independence.
ShareCourt Of Chancery Holds Demand Is Not Excused When Only Best Practices Were Not Followed
Wilkin v. Narachi, C.A. 12412-VCMR (February 28, 2018)
Demand on directors is not required when it is alleged that they have violated a statute or rule. But when the claim is only that they violated the "best practices” suggested by an agency, that is not enough to excuse demand on the board.
ShareDelaware Supreme Court Gives Preclusive Affect To Prior Dismissal In Wal-Mart Derivative Litigation
California State Teachers Retirement System v. Alvarez, No. 295, 2016 (Del. Jan. 25, 2018)
This is an important decision clarifying the rules regarding the preclusive effect a dismissal of a derivative suit may have on a similar suit pending or brought later in Delaware. This litigation saga involving a bribery scandal at Wal-Mart took some interesting turns, ping-ponging between the Delaware Court of Chancery and the Delaware Supreme Court. More ›
ShareDelaware Supreme Court Explains When Derivative Case May Be Dismissed
City of Birmingham Retirement and Relief System v. Good, No. 16, 2017 (December 15, 2017)
This decision explains again that actual or constructive knowledge of persistent corporate wrongdoing is needed before there is a substantial likelihood the directors may be liable and thus demand is excused. The Chief Justice's modest dissent points out that the facts are not fully developed at the motion to dismiss stage and he thought the complaint was good enough to warrant further discovery. This points out a potential problem in Delaware law. It will be a rare case where the board of director minutes provide clear notice of bad corporate conduct without some sort of corrective measure also promised. How sincere those promises are is hard to gauge just based on the minutes. Hence, pleading a case good enough to survive a motion to dismiss is getting harder.
ShareCourt Of Chancery Explains Caremark Claims
Oklahoma Firefighters Pension & Retirement System v. Corbett, C.A. 12151-VCG (December 18, 2017)
This decision is an exhaustive review of what constitutes a Caremark claim. It makes it clear that merely because the directors were aware of red flags and the corporation later suffered harm that is not enough to support a Caremark case. Instead, the facts must show scienter deliberate violation of the law or a conscious indifference to wrongdoing. What this may mean in practice is that if the board minutes show some effort to correct corporate problems, that may negate a finding of the necessary scienter. More ›
ShareCourt Of Chancery Issues A Definitive Opinion on Aronson
Lenois v. Lawal, C.A. No. 11963-VCMR (Nov. 7, 2017)
This case illustrates the power of well-functioning special committee to diffuse the potentially corruptive influence of a self-interested controller on a transaction. The result of a well-functioning special committee in this case was that the derivative plaintiff was unable to get around the pre-suit demand on the board requirement. Applying the second prong of the Aronson test for demand futility, the Court interpreted that portion of the test to require the plaintiff sufficiently allege that a majority of the board faces a substantial likelihood of liability for non-exculpated claims. In other words, that a non-exculpated claim may be brought against less than a majority of the board or some other individual at the company, or that the board committed exculpated duty of care violations, will not alone prove demand futility.
ShareCourt Of Chancery Explains Demand Excusal Based On Knowing Violations Of Law
Kandell v. NIV, C.A. No. 11812-VCG (Sept. 29, 2017)
Derivative plaintiffs alleging that directors allowed the corporation they serve to violate the law typically face dismissal for failure to make pre-suit demand on the board unless they allege a bad faith breach of the fiduciary duty of loyalty. To survive dismissal, plaintiffs need to sufficiently allege the directors knowingly cause the violation or knowingly failed to act—a very high bar. This decision explains that a knowing violation may be found, as it was here (at the motion to dismiss stage), when the law in question is clear and the illegal corporate practice in question is well known to the board.
ShareCourt Of Chancery Upholds Duty Of Care and Loyalty Claims
H&N Management Group Inc. v Couch, C.A. No. 12847-VCMR (Del. Ch. Aug. 1, 2017)
This is a rare case involving apparent lack of care in approving a conflicted transaction and a failure to employ almost any safeguards to ensure fairness. It is worth reading just to see what not to do, particularly when dealing with a very significant business decision to the particular company.
ShareCourt of Chancery Advocates New Test Governing Preclusion in Derivative Litigation
In re Wal-Mart Stores Inc. Delaware Derivative Litig., C.A. No. 7455-CB (Del. Ch. July 25, 2017)
This is an important decision holding that just because one derivative litigation was dismissed for failure to overcome the requirement of pre-suit demand on the board, it does not mean a similar derivative suit must be dismissed on the same grounds. Instead, under the rule advocated for in this decision, an earlier dismissal only affects the second suit if the first suit was dismissed after the plaintiff survived a demand futility motion or the board conceded that demand is excused. It is at that point which the plaintiff in the first suit was acting on the company’s behalf and its actions may bind other plaintiffs. Originally stated as dicta in the EZCORP decision, this rule, among other things, prevents ill-prepared and typically rushed derivative complaints from cutting off better prepared complaints. Previously, before a remand in this action, the Court had applied a rule that examined the “adequacy of representation” provided by the plaintiffs in the first suit. This “grossly deficient” representation standard generally favored defendants and made dismissal likely in the second suit. It remains to be seen whether the Delaware Supreme Court will adopt the EZCORP rule as endorsed by Wal-Mart.
ShareCourt Of Chancery Declines To Hold Unocal Claim Automatically Excuses Demand
Ryan v Armstrong, C.A. No. 12717-VCG (May 15, 2017)
A derivative plaintiff who fails to make a pre-suit demand on the board must show why demand is excused using particularized facts. Here, the plaintiff argued that demand was automatically excused by sufficiently pleading a Unocal claim. Some prior case law supports that argument, but the Court in this case rejected an automatic demand excused rule. Instead, the Court used the more traditional analysis that required either allegations of self-interest or sufficiently egregious conduct that showed bad faith. Allegations that the board was motivated by a desire to maintain their positions were not sufficient where the complaint lacked facts showing that keeping their jobs was material to each of them. Similarly, a decision to adopt an entrenchment device is not alone bad faith.
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