Two years ago the Delaware Supreme Court, in Marchand v. Barnhill, allowed Caremark claims to proceed against a group of directors in connection with a listeria outbreak at their company’s ice cream manufacturing plants. Applying Caremark — often quoted as “possibly the most difficult theory in corporat[e] law” — the court determined the board failed to implement reasonable oversight and monitoring on “mission critical issues.” There, food safety was “mission critical.” Since Marchand¸ courts have applied these principles to, among other cases, a biopharmaceutical company’s failure to comply with FDA regulations and an auto parts company’s failure to properly monitor its financial reporting. Now, the Delaware Chancery Court has provided another guidepost, this time in the aerospace industry, finding that certain of Boeing’s stockholders adequately pled Caremark claims against Boeing’s Board. (more…)
On Sept. 7, the Delaware Chancery Court allowed In re: The Boeing Co. Derivative Litigation to proceed, surviving a motion to dismiss.
The action alleges that directors breached their fiduciary duties with respect to their oversight of safety issues and arises out of two crashes of the company’s 737 MAX aircraft. (more…)
A pair of opinions released by the Delaware Supreme Court in a single week have revisited longstanding precedent governing shareholder suits that claim corporate wrongdoing. As discussed in a companion post on this blog, the first of those opinions, Brookfield Asset Management Inc. v. Rosson, restricted the ability of shareholders to bring direct claims under certain circumstances, instead forcing them to pursue more procedurally challenging derivative suits. In the second case, United Food & Commercial Workers Union & Participating Food Industry Employers Tri-State Pension Fund v. Zuckerberg, the Delaware Supreme Court adopted a new three-part demand-futility test that clarifies the standard shareholders must meet to file such derivative suits, without first taking their complaints to the company’s board of directors. (more…)
Every once in a while, a court admits it made a mistake. And, in even rarer circumstances, that admission comes from a court as prominent as the Supreme Court of Delaware. But that’s exactly what happened last week in Brookfield Asset Management, Inc. v. Rosson, in which Delaware’s highest court overruled its own 2006 holding in Gentile v. Rosette that certain claims of corporate dilution are “dual-natured” and may be pursued both as derivative claims and as direct claims by stockholders. The Court’s decision to revisit a much-criticized decision is likely to restore some predictability and analytic consistency to the resolution of an important and threshold question frequently presented in stockholder litigation: whether a claim is properly characterized as direct (on behalf of one or a class of a company’s stockholders) or derivative (on behalf of the company itself). (more…)
In M&A litigation, plaintiffs’ lawyers see actual or perceived conflicts of interest as gold. Conflict allegations can take many forms and arise in a variety of contexts: for example, a board member of a target company who is offered employment by the would-be acquirer, or a controlling stockholder who sits on both sides of a transaction. Another common example, and the focus of this post, is a board member or stockholder whose financial interests are alleged to diverge from other stockholders because of a need or desire to quickly liquidate holdings (referred to as a “liquidity-based conflict”). (more…)
For over 40 years, Delaware’s courts have recognized the special litigation committee (“SLC”) as an efficient means of judging the corporate interest served by a derivative suit when the full board is otherwise disabled by self-interest. Paired with that recognition, however, has been a longstanding skepticism of the structural biases that can affect SLC members. In the leading case of Zapata Corp. v. Maldonado, 430 A.2d 779 (Del. 1981), the Delaware Supreme Court warned that courts should “be mindful that directors are passing judgment on fellow directors in the same corporation . . . . The question naturally arises whether a ‘there but for the grace of God go I’ empathy may not play a role. And the further question arises whether inquiry as to independence, good faith and reasonable investigation is sufficient safeguard against abuse, perhaps subconscious abuse.” (more…)
In NIRI’s IR Update, Derek Zaba, Kai Liekefett, and Joshua DuClos published an article titled, “SPACs: A New Frontier for Shareholder Activism.” Their article discusses how the SPAC boom has created a new breeding ground for activism targets and how SPACs should prepare for an activist attack. (more…)