-
Delaware Court Of Chancery Holds Duke Energy Stockholders’ Derivative Suit Following Ouster Of CEO Partially Barred By Collateral Estoppel As A Result Of An Earlier Dismissal In North Carolina
09/19/2016On August 31, 2016, Vice Chancellor Sam Glasscock III of the Delaware Court of Chancery granted in part and denied in part a motion to dismiss derivative claims against eleven directors of Duke Energy Corp. (“Duke”). In re Duke Energy Corp. Derivative Litig., No. 7705-VCG, 2016 WL 4543788 (Del. Ch. Aug. 31, 2016). The Court made two key rulings: 1) some, but not all, of plaintiffs’ claims were precluded by a prior ruling by a North Carolina court; and 2) for the non-precluded claims, plaintiffs adequately alleged demand futility.
In 2011, Duke and Progressive Energy Inc. (“Progressive”) agreed to merge, subject to regulatory and stockholder approvals. The board of the combined company was to comprise eleven legacy Duke directors (“defendants”) and six legacy Progressive directors, and the CEO of Progressive was to be the CEO. Plaintiffs alleged that in the two months prior to closing, defendants soured on this plan and secretly decided to fire the Progressive CEO and replace him with the legacy Duke CEO, but nonetheless misrepresented their intentions to regulators in order to obtain regulatory approval of the deal. Once those approvals were received, the merger closed and the combined board approved the hiring of the CEO of Progressive, including a $44 million severance package. Minutes later, the defendants pushed through a surprise vote (opposed by all six legacy Progressive directors) to demand the resignation of the CEO.
Plaintiffs in the North Carolina action filed a derivative suit under Delaware law, alleging demand futility on the grounds that the defendants faced a substantial likelihood of personal liability “for breaching their fiduciary duties and wasting corporate assets by terminating [the Progressive CEO] and paying him a $44 million severance package.” The North Carolina court found that demand was not excused because Duke did receive a release of claims and other future cooperation from the CEO for the severance package and thus waste was inadequately pleaded.
Plaintiffs in the Delaware action (who filed later) based their claims on the facts that defendants caused the company to violate its disclosure obligations and cost Duke the value of the CEO’s severance package. Defendants moved for dismissal of the Delaware action on collateral estoppel grounds. Vice Chancellor Glasscock accepted defendants’ argument that the claims relating to the costs of firing the Progressive CEO were precluded. The Court found, however, that the allegations that the defendants “made a conscious decision to mislead regulators in violations of positive law” presented “fundamentally different issues” even though “the replacement of [the Progressive CEO] underlies both” those claims and the waste claims. Distinguishing cases in which the later-filed action contained more detailed and persuasive factual pleadings but nonetheless addressed the same issues, the Court found that these bad faith claims were sufficiently distinct, and alleged an injury different from the waste claims dismissed in North Carolina so that collateral estoppel did not bar them. In so holding, the Court cautioned that “this decision should not open the door to artful crafting by plaintiffs of new causes of action based on a single factual scenario in an attempt to avoid collateral estoppel.”
Finally, Vice Chancellor Glasscock found demand futility adequately pleaded, finding that the alleged facts raised a “reasonable doubt that the board on which demand would be made could exercise its business judgment on behalf of the company in evaluating the demand.”
