Delaware Court Of Chancery Assesses The Application Of Timeliness Principles To Caremark Red Flags Claim And Applies “Separate Accrual Approach” But Subsequently Dismisses Complaint For Failure To Plead Demand Futility
M&A and Corporate Governance Litigation
This links to the home page
  • Delaware Court Of Chancery Assesses The Application Of Timeliness Principles To Caremark Red Flags Claim And Applies “Separate Accrual Approach” But Subsequently Dismisses Complaint For Failure To Plead Demand Futility

    On December 15, 2022, Vice Chancellor J. Travis Laster of the Delaware Court of Chancery denied a motion to dismiss claims as untimely in a derivative action brought by stockholders against the officers and directors of AmerisourceBergen Corporation (the “Company”).  Lebanon County Employees’ Retirement Fund v. Collis, C.A. No. 2021-1118-JTL (Del. Ch. Dec. 15, 2022).  The Company is a wholesale distributor of pharmaceuticals that faced extensive investigations and litigation related to the opioid epidemic.  Plaintiffs primarily alleged that defendants breached their fiduciary duties by ignoring “red flags” related to the Company’s purported failure to report suspicious opioid orders.  Although the challenged conduct began nearly a decade earlier, plaintiffs did not even seek books and records until 2019.  The Court highlighted that “[n]o Delaware court has addressed the timeliness principles that govern” a Caremark red-flags claim.  The Court held that the “separate accrual approach” applies and, therefore, plaintiffs could assert claims with respect to alleged “conduct and consequences” that occurred within the three-year limitations period prior to their “vigilant[]” pursuit of claims.

    The Court explained that this approach addresses the conduct “as a sequence of wrongful acts, each of which gives rise to a separate limitations period” and, therefore, “the plaintiff can seek to impose liability and recover damages for any portion of the wrongful conduct where the statute of limitations has not yet run, but not for wrongful conduct that occurred earlier.”  The Court added that—in the context of a red-flags failure of oversight claim under In re Caremark International, Inc. Derivative Litigation, 698 A.2d 959 (Del. Ch. 1996)—the separate accrual approach “offers a Goldilocks regime that falls in between a too-defendant-friendly discrete act approach and a too-plaintiff-friendly continuing wrong approach.”

    Plaintiffs also alleged that defendants “knowingly caus[ed] [the Company] to seek profit by violating the law,” which the Court referred to as a “Massey [c]laim,” citing In re Massey Energy Co., 2011 WL 2176479 (Del. Ch. May 31, 2011).  The Court noted that Delaware courts had not yet addressed accrual principles with respect to this type of claim either.  The Court explained that the “level of [alleged] culpability” for a Massey claim might warrant the application of the “continuing wrong doctrine.”  Under that approach, “the wrongful act is not complete, and the limitations period does not begin to run, until the continuing wrong ceases[,]” and thus, if “any portion of the wrongful act” occurs within the limitations period, liability and damages are timely for the entire period.  But the Court concluded it need not reach that decision at this stage because the Massey claim would not be barred even under the separate accrual approach.

    As to both the red-flags claim and the Massey claim, the Court explained that application of the “discrete act” approach—which “applies in the vast majority of cases”—would “undermine Delaware’s system of corporate accountability.”  This is because “an initial decision to ignore a red flag or pursue an illegal business plan often will be difficult to detect and will not have discernable consequences” but would be considered under this approach to start the limitations clock even if the improper conduct continues.

    The Court also found that, under a “laches framework,” which applies to breach of fiduciary duty claims because they are equitable, the Court looks to when plaintiff “began vigilantly pursuing its claims” rather than to the date the suit was filed.  The Court held that the pursuit of books and records can be sufficient to stop the running of the limitations period with respect to a subsequent related derivative action.  On this basis, the Court used October 20, 2019 as the date when plaintiffs were considered to have begun pursuing their claims.  Applying a three-year statute of limitations, pursuant to 10 Del. C. § 8106, the Court determined that the actionable period began on October 20, 2016, and that the complaint alleged that defendants’ failure to respond to red flags and “pursuit of an illegal business plan” continued after that date.  Thus, the Court upheld plaintiffs’ claims under the separate accrual approach for alleged “conduct and consequences” after that date.

    However, in a separate decision issued a week later, on December 22, 2022, Vice Chancellor Laster dismissed the claims in their entirety for failure to plead demand futility.  Lebanon County Employees’ Retirement Fund v. Collis, C.A. No. 2021-1118-JTL (Del. Ch. Dec. 22, 2022).  The Court noted that, “[s]tanding alone,” the alleged investigations and lawsuits that the Company faced related to the opioid epidemic “without any apparent response” and the purported decisions to keep an allegedly inadequate suspicious order framework in place would support red-flags and Massey claims.  But the Court highlighted that a post-trial decision from a separate case against the Company expressly rejected plaintiffs’ underlying theory and found instead that the Company had complied with its suspicious order (or “anti-diversion”) obligations.  The Court noted that the findings from that decision “are not preclusive, but they are persuasive.”  The Court thus concluded that it is “not possible” to infer that a majority of directors face a substantial likelihood of liability.  Accordingly, the Court held that the failure of plaintiffs to make a pre-suit demand on the board cannot be excused and dismissed the complaint.