Chancery Rejects ‘Quibbles’ As The Basis For Caremark Claims, Underscoring The Wide ‘Gulph’ Between Imperfect Compliance and Purposeful Lawbreaking
On October 1, 2024, in In re TransUnion Derivative Stockholder Litigation, Vice Chancellor Will in the Delaware Court of Chancery dismissed a derivative suit against the Directors of TransUnion for allegedly breaching their fiduciary duty of oversight in relation to agreements made pursuant to a Consumer Financial Protection Bureau (“CFPB”) consent order. The Court concluded that Plaintiffs failed to establish a breach under both theories presented, one under Caremark and one under In re Massey Energy, because while the TransUnion Directors may have conducted their oversight duty imperfectly, they did so with a good faith effort.
Caremark claims are not infrequent in Delaware, and this blog has covered such cases before (see here). As background, a plaintiff pleading a breach of the duty of oversight must allege sufficient facts to support a reasonable inference that the fiduciary acted in bad faith. Under Caremark, such bad faith can be established when fiduciaries (1) utterly fail to implement any reporting or information system or controls; or (2) having implemented such a system or controls, continuously fail to monitor or oversee its operations, which disables them from being informed of risks or problems requiring their attention. Recently, some Caremark progeny, such as Massey, where the fiduciaries were alleged to have prioritized profit over legal compliance, have led to arguments distinguishing them from traditional Caremark claims.
In In re Transunion, the Delaware Court of Chancery rejects this striation and separation of Caremark claims, instead proffering a unified oversight framework. The case further reminds attorneys, directors, and officers alike that perfection is not required to combat a breach of oversight claim — just a legitimate, good faith effort.
Background
The facts of In re TransUnion center around a governmental investigation and attempted corporate remediation of TransUnion’s advertising and marketing practices. TransUnion is a Delaware corporation that provides credit reporting services to consumers worldwide. Starting in 2015, the CFPB initiated an investigation into two main elements of TransUnion’s advertising and marketing practices: (1) advertisements about the utility of the credit scores calculated by “VantageScore,” the Company’s proprietary model; and (2) the Company’s “negative billing structure” where it automatically enrolled consumers in credit monitoring services after a trial period. Throughout, management kept the Board informed of the CFPB’s investigation.
This investigation led to a 2017 consent order (the “Consent Order”), where TransUnion agreed to certain remediation efforts to address the aforementioned practices. Relevantly, the Company was to include a header titled “What You Need to Know,” detailing the utility of VantageScore where the header text was double the size of the utility information. In addition, TransUnion was required to include a check box at the end of its final order page for registration in its free/discounted trials that conspicuously stated that the consumer consented to being billed for the service after the trial. It also required that TransUnion have a “simple mechanism for a consumer to immediately cancel” the service if purchased.
TransUnion hired a former CFPB enforcement attorney to assist in implementing the requirements in the Consent Order, of which management kept the Board informed. However, in 2019, the CFPB notified TransUnion of three potential violations of the Consent Order: (1) failure to include agreed-upon information in certain advertisements that appeared on third-party websites, (2) discrepancies between the language agreed upon in the Consent Order about the utility of VantageScore and the language the company was using, and (3) the “What You Need to Know” header font was smaller than what had been agreed. As a result, the CFPB initiated proceedings against the Company in the Northern District of Illinois to enforce the Consent Order. That litigation currently remains pending.
Following receipt of documents pursuant to a 220 books and records demand, Plaintiffs filed a derivative action against the Company. In the complaint, Plaintiffs alleged two distinct claims. The first, a so-called Massey claim, alleged that the Board “allowed TransUnion’s pursuit of profits to take precedence over its legal compliance.” Plaintiff distinguished this claim from a claim that the Board “consciously disregard[ed] TransUnion’s non-compliance with the Consent Order,” demonstrating bad faith under Caremark prong two.
The Decision
Dismissing the Complaint, Vice Chancellor Will framed the spectrum of claims “rooted in the fundamental rule that Delaware corporations operate lawfully.” The Court rejected the “bright line the [P]laintiffs work[ed] to draw between Caremark and Massey,” and held that “Massey did not create a separate claim untethered from those explored in Caremark and Stone. All flow from the most basic obligation of directors and officers: to ensure that, in seeking profit, a corporation conducts lawful business by lawful means.”
With this in mind, the Court outlined the history of Caremark and its predecessors, and then proceeded to outline the Caremark “continuum” along with three situations that run along it. On the most extreme end of the spectrum is the Massey claim, where “directors and officers purposely caused the corporation to break the law in pursuit of greater profits,” and the legal violation is “integral” to the company’s operations. The second situation is a Caremark prong one claim, where a plaintiff alleges that “the board knowingly failed to implement a system to monitor legal compliance.” The last is a claim under Caremark prong two, where a board fails to monitor or “make a good-faith effort to address identified risks,” where such risks are not “business matters on which deference to the directors’ decision-making is owed” and are “legal violations so obvious and material that disregarding them amounts to bad faith.” Importantly, for all three claims, “a sincere effort by directors to fulfill their oversight duties removes the potential for personal liability.”
After establishing this framework, Vice Chancellor Will stated that Plaintiffs’ two claims stood “in tension” with each other because “the same conduct would reflect action [for the Massey claim] and inaction [for the Caremark claim]. It cannot logically be both.” Ultimately, it turned out to be neither. On the Massey claim, the Court criticized Plaintiffs’ decision to push “the most extreme iteration of a failed oversight claim” over such petty discrepancies like “a missing check box, the use of ‘may not’ versus ‘not likely,’ and the wrong font size.” Despite these oversights, the Board had made “good faith efforts [that] ultimately fell short” instead of the “purposeful lawbreaking” that is the hallmark of a Massey claim. This also doomed Plaintiffs’ Caremark prong two claim, as Delaware courts have “consistently held that imperfect attempts at compliance are not indicative of bad faith.” Plaintiffs’ argument would “turn[] Caremark jurisprudence on its head.”
Conclusion
In re TransUnion provides a useful articulation of Caremark and its progeny as a spectrum; while there have been attempts to cabin these oversight claims in the way Plaintiffs did here, appreciating them as a continuum and understanding where a given situation sits on that continuum can make a difference in the allegations’ success or failure.
In addition, Vice Chancellor Will drives home a key point at the end of her opinion: “‘[T]here is a vast difference between an inadequate or flawed effort to carry out fiduciary duties and a conscious disregard for those duties.’ There is an even wider gulph between imperfect compliance and purposeful lawbreaking.” Directors and officers need not let perfect become the enemy of the good; a good-faith effort to fulfill their duties will be sufficient in Delaware.
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.
