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Delaware Court Of Chancery Dismisses Derivative Claim For Breach Of Duty Of Oversight, Finding Failure To Establish Demand Futility
03/26/2024On February 19, 2024, Vice Chancellor Lori Will of the Delaware Court of Chancery dismissed a derivative breach of fiduciary duty action against nominal defendant Walgreens Boots Alliance, Inc. (the “Company”) and its board of directors (the “Board”), alleging the Company’s billing practices for insulin resulted in unnecessary refill reminders and overbilling of third-party payers. Clem v. Skinner, No. 2021-0240-LWW (Del. Ch. Feb. 19, 2024). Plaintiffs asserted that pre-suit demand was excused because the Board faced a substantial likelihood of liability for breaching their duty of oversight. The Court found that plaintiffs failed to adequately allege facts suggesting that the Board acted in bad faith, as required to plead a Caremark claim, and thus granted the motion to dismiss, finding that pre-suit demand was not excused.
Plaintiffs asserted that the Company’s dispensing and billing practices for insulin pens resulted in participants in certain government programs receiving premature refill notices and substantial paid claims that would not have been approved had the Company followed market standard practices. Plaintiffs contended that the Board breached their fiduciary duty of oversight under both prongs of Caremark, alleging that the Board 1) failed to implement any reporting or information system or controls that would have caught the discrepancies (a so-called “Prong One” claim), and 2) consciously disregarded various red flags revealing the problems (a “Prong Two” claim).
The Court rejected plaintiffs’ Prong One argument, noting that the audit committee of the Board met regularly, received detailed presentations from the Chief Compliance Officer, and routinely updated the Board on regulatory and compliance risks and developments. The Court described plaintiffs as essentially arguing that “the Board should have fulfilled its oversight duties differently” and noted that (i) “how directors choose to craft a monitoring system in the context of their company and industry is a discretionary matter,” and (ii) the monitoring system in place at the Company worked, with relevant information being identified and conveyed to the Board.
The Court rejected plaintiffs’ Prong Two claim, finding that the audit committee and advisor reports that plaintiffs contend identified gaps in the Company’s compliance program had nothing to do with insulin billing practices. The Court noted that “[k]nowledge of illegality in one corner of a vast business does not mean that directors were on notice of a distinct problem in another.” The Court also rejected plaintiffs’ reliance on a civil investigation demand to the Company about its insulin billing practices, holding that receipt of a subpoena or investigation notice does not—absent evidence that the Board knew of ongoing legal violations—prove bad-faith disregard of red flags.
Because plaintiffs failed to allege that the Board acted in bad faith, the Court held that the Board did not face a substantial likelihood of liability and thus pre-suit demand was not excused. In so holding, the Court emphasized that Caremark claims are not intended to redress perceived “imperfect efforts [or] operational struggles,” nor to second-guess “business decisions” that a plaintiff believes “came too late and did too little.”
