Delaware Business Litigation Report

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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