Last month, Delaware’s Court of Chancery issued two significant decisions in a stockholder litigation involving AmerisourceBergen Corporation (the “Company”) and its wholesale distribution of prescription opioids in the United States. Together, the decisions provide companies and their directors and officers with further guidance regarding the viability of so-called Caremark claims alleging breaches of fiduciary duties.
First, on December 15, 2022, in Lebanon County Employees’ Retirement Fund v. Collis et al., Vice Chancellor Laster declined to dismiss as untimely Plaintiffs’ derivative claims against the Company’s directors and officers relating to Defendants’ oversight and implementation of the Company’s anti-diversion control systems regarding opioids.
But then, in a second decision issued just one week later, based on a trial judgment in a separate case against the Company, Vice Chancellor Laster dismissed Plaintiffs’ claims with prejudice, pursuant to Court of Chancery Rule 23.1, for failure to plead demand futility. In other words, Plaintiffs failed to demonstrate that they had standing to pursue derivative claims on behalf of the Company.
As regular readers of our Blog are well aware (some of our previous posts discussing demand futility can be viewed here and here), a stockholder may derivatively pursue a cause of action belonging to a corporation only if (i) the stockholder first demands that the company’s directors pursue the claim and the directors wrongfully decline to do so, or (ii) demand is excused because the company’s directors are incapable of making an impartial decision whether to pursue the claim on the company’s behalf.
The Delaware court’s December 22 ruling underscores the importance of Section 141(a) of the Delaware General Corporation Law—which, as the court noted, bestows statutory authority in the board of directors of a corporation “to determine what action the corporation will take with its litigation assets, just as with other corporate assets”—and may have significant effects for similar derivative actions pending in the Court of Chancery and elsewhere.
Plaintiffs’ derivative suit sought billions of dollars in damages predicated on two theories of breach of fiduciary duty: (i) a “prong-two” Caremark claim, by which Plaintiffs alleged that Defendants consciously ignored “red flags” (i.e., congressional investigations, subpoenas, spates of civil lawsuits and those brought by state attorneys general, and below-average suspicious order reporting) and failed to monitor or oversee anti-diversion control systems, evidencing Defendants’ legal non-compliance with their obligation to report to the federal government, and not fill, suspicious opioid prescription orders, or to first conduct sufficient diligence to ensure filled orders would not be diverted for improper means; and (ii) a “Massey Claim,” by which Plaintiffs alleged that Defendants expanded the Company’s prescription opioid distribution networks without devoting comparable resources to strengthen the Company’s anti-diversion control systems, thereby knowingly pursuing a business plan that prioritized profits over compliance.
In his December 22 opinion, Vice Chancellor Laster concluded that the Plaintiffs’ allegations would support a pleading-stage inference that Defendants knew that the Company was reporting low levels of suspicious orders and did not take meaningful steps to address the issue. However, he took judicial notice of “a final factor that fatally undermine[d]” Plaintiffs’ allegations: the post-trial decision in City of Huntington v. AmerisourceBergen Drug Corp., a West Virginia case in which plaintiffs City of Huntington and Cabell County Commission alleged that the Company and other industry-leading wholesale distributors of pharmaceutical products failed to comply with their anti-diversion obligations regarding prescription opioid distribution. Following a two-month trial in that action, U.S. District Judge David A. Faber concluded the Company and the other defendants did not violate their anti-diversion obligations and thus did not intentionally violate any laws to place profits over compliance. In fact, the City of Huntington court expressly found, as a matter of fact, that the Company had complied with its anti-diversion obligations: “Plaintiffs did not prove that defendants failed to maintain effective controls against diversion and design and operate sufficient [Suspicious Ordering Monitoring] systems to do so. Relatedly, plaintiffs did not prove the defendants’ due diligence with respect to suspicious orders was inadequate.” Based on these findings, the court concluded “[n]o culpable acts by defendants caused an oversupply of opioids” in the geographic areas at issue.
In the second decision in the Delaware derivative suit, Vice Chancellor Laster noted that Plaintiffs’ two claims—their “red flags” theory and their “Massey” theory—both “depend on an inference that the officers and directors knowingly failed to cause the Company to comply with its anti-diversion obligations, either because they consciously ignored red flags that put them on notice of violations or because they intentionally adopted a business plan that prioritized profits over compliance.” He concluded that, in view of City of Huntington—a persuasive decision based on a thorough analysis—“it is not possible to infer that the Company failed to comply with its anti-diversion obligations, nor is it possible to infer that a majority of the directors who were in office when the complaint was filed face a substantial likelihood of liability on the plaintiffs’ claims.” In other words, City of Huntington “knocks the stuffing” out of Plaintiffs’ red-flags theory of liability. Moreover, because the trial court in City of Huntington found as a matter of fact, after trial, that the Company’s business plan did not violate any law, “it is not possible to infer” at the pleading stage in Lebanon “that management and the board consciously embarked on a business plan that violated the law.” Vice Chancellor Laster thus concluded “it is not possible to infer that [Plaintiffs’] Massey Claim poses a substantial threat of liability to the [D]efendants.”
Accordingly, because Plaintiffs’ allegations failed to support a sufficient basis to excuse their failure to make a demand upon the Company’s board, they lacked standing to pursue their claims derivatively on behalf of the Company.
It is too soon to tell whether Lebanon will have a significant, practical effect on similar opioid-related litigation challenging other companies’ anti-diversion controls and oversight of same, in Delaware and elsewhere. However, Lebanon provides an occasion for reminding corporate litigants and practitioners of the importance of demand futility jurisprudence, as well as company boards’ dominion over their companies’ litigation assets. In addition, Lebanon underscores the potential impact that separate, underlying litigation may have on derivative actions involving related claims.
Finally, as in Lebanon, courts routinely utilize their discretion to take judicial notice of separate, related litigation to evaluate the sufficiency of pleaded claims, which serves as a further reminder to parties involved in derivative suits of the potential significance of underlying litigation in other fora.
This post is as of the posting date stated above. Sidley Austin LLP assumes no duty to update this post or post about any subsequent developments having a bearing on this post.