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.

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“Thick-As-Thieves” Narrative Persuades Court That Director Independence Is In Question in Carvana

The Delaware Court of Chancery recently denied a motion to dismiss stockholder derivative claims against Carvana Co. arising out of a stock offering Carvana announced in March 2020. The Court found that, based on the plaintiff’s allegations, it was reasonably conceivable that the stock offering had been orchestrated to take advantage of pandemic-related market volatility to benefit investors hand-selected by Carvana’s controlling stockholders. In doing so, the Court rejected the defendants’ arguments of demand futility and provided useful guidance regarding the types of allegations necessary to establish a director’s lack of independence.

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Don’t Let the Fox in the Henhouse: Lessons from the El Pollo Loco Decision on Special Litigation Committee Independence

In a recent split decision in Diep v. Trimaran Pollo Partners LLC et al., the Delaware Supreme Court, sitting en banc, addressed the level of independence required of members of Special Litigation Committees recommending dismissal of shareholder derivative actions. (more…)

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Securities Litigation Against Life Sciences Companies: Eleven Takeaways from 2021

Securities class actions against life sciences companies are almost always second-order problems.  The first-order problem is a business or regulatory setback that, when disclosed by the company or a third party, is followed by a stock price drop.  Following the decline, plaintiffs’ class-action attorneys will search the company’s previous public statements in search of inconsistencies between past positive comments and the current negative development.  In most cases, plaintiffs’ attorneys will seek to show that any arguable inconsistency amounts to fraud—that is, they will claim that the earlier statement was knowingly or recklessly false or misleading.  Where a company makes the challenged statement in a public offering document (that is, a registration statement or prospectus), plaintiffs need only show that the statement was materially false or misleading, not that it was made with scienter, i.e., the requisite state of mind.

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Best Practices for Minute-Taking: Three Lessons from Recent Caremark Decisions

As has been frequently noted on this page, the Delaware Supreme Court’s landmark 2019 decision, Marchand v. Barnhill, marked the beginning of a series of cases in which Delaware courts refused to dismiss shareholder derivative actions alleging oversight breaches—so-called Caremark claims, which are often quoted as “possibly the most difficult theory in corporat[e] law” on which to bring a successful lawsuit. Typically following a books and records demand, these cases shine a spotlight not only on the oversight that boards perform, but also on the manner in which that oversight is documented in a company’s formal records. This post reviews, from a corporate record-keeping perspective, themes drawn from a selection of recent cases in which Delaware courts permitted cases to proceed on Caremark theories and implications for best practices in light of these themes. (more…)

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Caremark’s Comeback Includes Potential Director Liability in Connection With Data Breaches

A Caremark­-based claim against a board of directors alleging a failure to monitor corporate operations has been said to be “the most difficult theory in corporation law upon which a plaintiff might hope to win a judgment,” or at least to withstand a motion to dismiss.  Yet, Caremark has taken on renewed importance — as noted by this blog — following recent high-profile successes on duty-to-oversee claims, most notably in Marchand v. Barnhill in 2019 and In re Boeing in September 2021, and recent shareholder lawsuits alleging that data breach- and cybersecurity-related failures would have been preventable were it not for oversight failures by corporate officers and directors, are being plead asserting Caremark claims. (more…)

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Seventh Circuit Says Delaware Companies May Not Bar The Door To Federal Court For Federal Proxy Fraud Derivative Claims

I.        Introduction

The Seventh Circuit recently issued an important decision holding that an exclusive forum provision in a company’s bylaws requiring that all derivative actions be brought in Delaware Chancery Court is unenforceable as applied to derivative cases brought under the federal proxy laws. On its face, Seafarers Pension Plan v. Bradway seems to foreclose the use of exclusive forum provisions for claims for which there is exclusive federal jurisdiction. As the Seventh Circuit notes, that would seem to be consistent with both federal proxy fraud law, which forbids contractual waivers of compliance with the law, as well as Delaware state law. But as discussed below, there is reason to believe that the decision may not be the last word on the topic, and, indeed, that it could end up before the U.S. Supreme Court. (more…)

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The Refined Demand Futility Standard Takes Shape

Over the past several months, a number of decisions released by the Delaware courts have begun to grapple with the new Zuckerberg three-part demand futility standard announced by the Delaware Supreme Court in September. Many cases spotlight the need to assess demand futility on a director-by-director basis. But at least one recent decision has highlighted another aspect of the test, and instead turns on the need to assess demand futility on a transaction-by-transaction basis. In In re Vaxart, Inc. Stockholder Litigation, Vice Chancellor Fioravanti dismissed several claims from a shareholder derivative suit purportedly filed on behalf of Vaxart, Inc. because the plaintiffs failed to allege that a majority of the directors received a material personal benefit or faced a substantial likelihood of liability from the specific transaction that would have been the subject of the pre-suit demand. (more…)

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Chancery Court Issues Rare Finding of Wrongful Refusal of Demand – Followed By A Reminder of Why Such Findings Are So Uncommon

On October 29, 2021, the Delaware Court of Chancery issued a rare opinion holding that plaintiffs had succeeded in pleading that a board of directors wrongfully had refused their demand to pursue certain claims. Following short on its heels on November 8, 2021 was another decision illustrating why such opinions are so rare, and the high burden plaintiffs must meet in order adequately plead wrongful refusal. (more…)

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No Strict Liability for Improper Share Repurchases or Payment of Dividends: Directors Are “Fully Protected” if They Rely in Good Faith upon Corporate Records, Officers, or Experts

In re the Chemours Company Derivative Litigation, Vice Chancellor Glasscock recently wrestled with an apparent conflict between two provisions of the Delaware General Corporation Law (DGCL)—and chose the path that protects directors. Vice Chancellor Glasscock refused to hold directors strictly liable for negligent stock repurchases or dividends—which would be inconsistent with Delaware’s general limitation on director liability solely to damages for gross negligence (unless exculpated) or loyalty breaches—and instead enforced an “incongruent” provision that accords directors protection where they rely on corporate records, officers, or experts with respect to corporate surplus available to repurchase shares or issue dividends. (more…)