Delaware Court Of Chancery Dismisses Caremark Claims Alleging Breaches Of Fiduciary Duty Following A Cyberattack
On September 6, 2022, Vice Chancellor Sam Glasscock III of the Delaware Court of Chancery granted a motion to dismiss derivative claims for breach of fiduciary duty brought by stockholders of a software company (the “Company”) against its directors following a cyberattack. Construction Industry Laborers’ Pension Fund v. Bingle, No. CV 2021-0940-SG (Del. Ch. Sep. 6, 2022). After the Company allegedly fell victim to hackers who accessed confidential information on the systems of thousands of its customers, plaintiffs alleged that defendants had failed to adequately address the risk to cybersecurity in breach of their oversight obligations under Caremark. The Court indicated that cybersecurity is “mission critical” for online service providers and the complaint alleged oversight practices that were “far from ideal.” But the Court held that pre-suit demand was not excused because the complaint did not plead “specific facts” from which the Court could “infer bad faith liability.”
Delaware Court Of Chancery Dismisses Derivative Suit For Failure To Allege Substantial Likelihood Of Liability Sufficient To Excuse Pre-Suit Demand
On June 30, 2022, Chancellor Kathaleen St. J. McCormick of the Delaware Court of Chancery granted a motion to dismiss derivative claims for breach of fiduciary duty brought by a stockholder of an energy company (the “Company”) against its directors following an incident involving explosions in the pipeline system of one of its natural gas distribution subsidiaries. City of Detroit Police and Fire Retirement System v. Hamrock, C.A. No. 2021-0370-KSJM (Del. Ch. June 30, 2022). Plaintiff claimed that the board breached its oversight obligations under Caremark by allegedly failing to implement a reporting and monitoring system relating to pipeline safety and ignoring “red flags.” The Court held that pre-suit demand under Court of Chancery Rule 23.1 was not excused because the complaint did not adequately plead that the directors faced a substantial likelihood of liability.
Delaware Court Of Chancery Declines To Dismiss Claims Related To Direct Offering At The Outset Of The Pandemic
On June 30, 2022, Chancellor Kathaleen St. J. McCormick of the Delaware Court of Chancery denied a motion to dismiss stockholder derivative claims for alleged breaches of fiduciary duty against the CEO/Chairman of an e-commerce car company (the “Company”). In Re Carvana Co. Stockholders Litigation, C.A. No. 2020-0415-KSJM (Del. Ct. Ch, Jun. 30, 2022). Plaintiffs alleged that the CEO/Chairman and his father controlled the Company and “orchestrated” a $600 million direct offering to selected investors in which they purchased $50 million of common stock in March 2020 when the Company’s stock price was depressed due to pandemic-related volatility. The Court held that plaintiffs adequately pleaded that pre-suit demand was excused because two of the Company’s other directors lacked independence from the CEO/Chairman. The Court further found that the transaction was subject to entire fairness—rather than deferential business judgment—review because it allegedly involved a non-ratable benefit not shared by the public stockholders and half the board lacked independence. Finally, the Court held that the CEO/Chairman’s abstention from the board’s vote approving the offering was insufficient to warrant dismissal at the pleadings stage.
Delaware Court Of Chancery Applies Contemporaneous Ownership Requirement And Declines To Extend Equitable Derivative Standing
On May 13, 2022, Chancellor Kathaleen St. J. McCormick of the Delaware Court of Chancery dismissed certain stockholder derivative claims for breaches of fiduciary duty brought against the founder-CEO and other directors of Flashpoint Technology, Incorporated (the “Corporation”). SDF Funding LLC v. Fry, C.A. No. 2017-0732-KSJM (Del. Ch. May. 13, 2022). Plaintiffs were a limited liability company (the “New LLC”) that held shares in the Corporation and its sole owner (the “Beneficial Owner”). The New LLC received its shares from another limited liability company (the “Old LLC”) — a nonparty to the suit — also wholly owned by the Beneficial Owner. Plaintiffs challenged certain related-party transactions, including leases from and loans to entities affiliated with the CEO. Applying the “contemporaneous ownership requirement,” the Court granted summary judgment to defendants for claims based on conduct that predated the acquisition of shares by the New LLC. In doing so, the Court rejected plaintiffs’ contention that the Beneficial Owner should have “equitable standing.”
Eighth Circuit Affirms Dismissal Of Merger-Related Derivative Suit For Failure To Plead Demand Excusal
On April 7, 2022, the United States Court of Appeals for the Eighth Circuit affirmed the dismissal of derivative claims brought by shareholders of Centene Corporation (the “Corporation”) against directors and officers of the Corporation following its merger with Health Net, Inc. (the “Target”). Carpenters’ Pension Fund of Ill. v. Neidorff, No. 20-3216 (8th Cir. Apr. 7, 2022). In connection with the merger, the companies issued a joint proxy statement soliciting shareholder approval of the merger. Plaintiffs’ central allegation was that defendants purportedly concealed their knowledge of “significant financial problems” faced by the Target. Plaintiffs thus asserted derivative claims for violation of Section 14(a) of the Securities Exchange Act and breaches of fiduciary duty. The Court held that pre-suit demand was not excused, because the complaint failed to adequately plead that at least five of the nine board members at the time the suit was filed faced a substantial likelihood of liability.