Chancery Court Reminds Bricklayers of Sturdy Foundation Required to Plead Demand Futility for Caremark Claims
Last month, in Bricklayers Pension Fund of Western Pennsylvania v. Brinkley, Delaware’s Court of Chancery dismissed a stockholder plaintiff’s derivative suit against the directors and officers of Centene Corporation for purported breaches of fiduciary duty in connection with their oversight of company compliance with Medicaid laws and regulations. The Court concluded that the plaintiff failed to establish demand futility pursuant to Court of Chancery Rule 23.1. Put another way, the plaintiff failed to demonstrate that it had standing to pursue claims on behalf of Centene.
“Bad Things Can Happen to Corporations” – But Officers Cannot Be Liable Absent Bad Faith
In Segway, Inc. v. Cai, the Delaware Court of Chancery dismissed one of the increasingly common breach of fiduciary duty cases brought against corporate officers after last year’s seminal McDonald’s decision, which clarified that officers owe a duty of oversight just as directors do. No doubt reassuringly for those officers, Vice Chancellor Will corrected the “misimpression that an oversight claim pursued against an officer is easier to plead than one against a director.” The opinion definitively confirms that “bad faith remains a necessary predicate to any Caremark claim.”
A Judicial Notice That Judicial Notice Has Its Limits
In a significant decision the week before the Christmas holiday, the Delaware Supreme Court, sitting en banc, reversed the Delaware Court of Chancery’s dismissal of Lebanon County Employees’ Retirement Fund v. Collis et al. (“Lebanon”), reinstating stockholder derivative claims against the directors of AmerisourceBergen Corporation arising out of the Company’s wholesale distribution of prescription opioids in the United States. Interested readers can view our blog’s prior discussion of the Court of Chancery’s dismissal here.
Can ChatGPT Do Our Jobs Better Than Us? Not Yet.
Artificial intelligence and its impact on the practice of law is in the news again. Readers likely have heard about the attorneys that used ChatGPT, an artificial chatbot that synthesizes high volumes of data, to draft a legal brief that they submitted in a civil action in the U.S. District Court for the Southern District of New York. Unfortunately for these practitioners, ChatGPT cited multiple cases that did not exist, and the attorneys recently endured a sanctions hearing before the presiding district judge.
Corporate Officers’ Role in Corporate Governance: What Officers Need to Know
The recent Delaware Court of Chancery decision, In re McDonald’s Corporate Stockholder Derivative Litigation is a reminder of corporate officer duties and the vital role that corporate officers play in corporate governance, at both publicly and privately held corporations. These duties stem from officers’ status as both agents and fiduciaries. For boards of directors and other officers to perform their roles effectively, it is critical for officers to understand an satisfy their duties. Failure to do so may deprive boards of directors of information they need to monitor operations, mitigate risks and establish strategy and can expose officers to personal liability.
Court of Chancery Dismisses Director Oversight Claims Related to Mission Critical Risk
In a March 1, 2023 opinion (In re McDonald’s Corp. Stockholder Derivative Litig., C.A. No. 2021-0324-JTL), the Delaware Court of Chancery dismissed duty of oversight claims against director defendants and provided helpful guidance on “mission critical” risks, the “gross negligence” standard under the business judgment rule, and redactions in productions of books and records under DGCL Section 220, including the potential that a motion to dismiss relying on overly redacted documents from a 220 production could be converted to a motion for summary judgment by the court. The court also entered an order on the same day, granting the defendants’ Rule 23.1 motion and dismissing the action in its entirety, including claims against the company’s former Global Chief People Officer. The court had previously denied a motion to dismiss those claims under Rule 12(b)(6) on January 25, 2023, as discussed further here, underscoring the important role of Rule 23.1 in derivative cases.
Where Caremark Meets Park: A New Era of Regulatory Compliance and Criminal Liability
In a recent post on PharmExec.com, Paul Kalb (a co-founder of Sidley’s Global Life Science practice) and Coleen Klasmeier (a former partner who co-led Sidley’s Food, Drug and Medical Device practice) discuss how the intersection of the Caremark and Park doctrines impact life science companies, particularly when it comes to regulatory compliance and the liability of company officials.
Delaware Court of Chancery Addresses Officer Oversight Obligations
In a January 25, 2023 opinion (In re McDonald’s Corp. Stockholder Derivative Litig., C.A. No. 2021-0324-JTL), the Delaware Court of Chancery clarified that corporate officers’ fiduciary duties encompass a duty of oversight. As with directors, the duty of oversight requires that officers: (1) make a good faith effort to put in place reasonable information systems to generate the information necessary to address risks and report upward to higher level officers or the board; and (2) not consciously ignore red flags indicating that the company may suffer harm. The Court of Chancery also clarified that officers will not be held liable for violations of the duty of oversight unless they are shown to have acted in bad faith, as opposed to mere gross negligence.
Trial Judgment “Knocks The Stuffing” Out Of Putative Derivative Suit Relating To Opioid Distribution
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.
Board’s Good-Faith Oversight of “Mission Critical” Risks Insulates Directors from “Caremark” Claim
In 1996, the Delaware Court of Chancery issued its seminal decision in In re Caremark International Inc. Derivative Litigation, which establishes the framework for director oversight liability under Delaware law. Over time, Delaware courts frequently observed that this type of claim was “possibly the most difficult theory in corporation law upon which a plaintiff might hope to win a judgment,” and these claims rarely advanced beyond the motion-to-dismiss stage. However, in a three-year span beginning in 2019, Delaware courts denied motions to dismiss Caremark claims in five cases, leading some to question whether the Caremark standard has been relaxed. A recent Court of Chancery decision issued earlier this summer provides an important counterpoint to this recent commentary, while underscoring that boards must exercise rigorous oversight over “mission critical” risks.
