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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
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- February 19, 2021
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Showing 8 posts in Fiduciary Duties.
Chancery Rejects Breach of Fiduciary Duty Claim Based On Diversified Investor Model
McRitchie v. Zuckerberg, et al., C.A. No. 2022-0890-JTL (Del. Ch. April 30, 2024)
Delaware follows the "single-firm model,” meaning that a director of a corporation owes duties to the stockholders as investors in that corporation. The plaintiffs here brought claims based on a different theory—the "diversified investor model," wherein directors owe duties to the corporation and its stockholders as diversified equity investors. Under this model, rational investors are seen as having diversified investments, and their returns are maximized when the economy as a whole improves. Thus, to comply with their fiduciary duties under this model, directors must manage the corporation based on what would be best for the economy as a whole rather than what would be best for the firm. More ›
Chancery Dismisses Caremark Action Based on Insufficient Allegations of Bad Faith
Clem v. Skinner, et al., C.A. 2021-0240-LWW (Del. Ch. Feb. 19, 2024)
This Caremark decision involved the retail pharmacy company, Walgreens, and concerned billing practices for a particular insulin pen product that gave rise to unnecessary refill reminders and overbilling, which led to a government investigation and a whistleblower lawsuit. A stockholder plaintiff brought this related derivative action against Walgreens' directors and officers. The Court of Chancery easily disposed of the claims under Rule 23.1 for failure to allege demand futility. According to the Court, the plaintiff's allegations demonstrated that Walgreens' board fulfilled its oversight duty by enacting a board-level monitoring system and by responding to red flags. Indeed, soon after learning of the whistleblower action, the company considered and remedied the problem through software changes. And the plaintiff's contention that the board's actions “came too late and did too little” was “incompatible with bad faith—a necessary component of any Caremark claim.” Notably, the Court expressed some concern about the uptick of Caremark suits, cautioning that “more harm than good comes about if Caremark claims are reflexively filed” whenever an alleged defect is discovered or investigated.
Chancery Upholds Challenge to TripAdvisor’s Conversion from a Delaware Corporation into a Nevada Entity
Palkon v. Maffei, C.A. 2023-0449-JTL (Del. Ch. Feb. 20, 2024)
This decision arose out of TripAdivor’s conversion from a Delaware corporation into a Nevada corporation. The company’s CEO and Chair had voting control and approved the conversion. The board did not condition the transaction on special committee approval or a majority of the minority stockholder vote. The plaintiff challenged the conversion on the grounds that the CEO and the board approved it to secure litigation protections for themselves under Nevada law more favorable than under Delaware law. More ›
Chancery Invalidates Elon Musk’s $55.8 Billion Pay Package
Tornetta v. Musk, et al., C.A. 2018-0408-KSJM (Del. Ch. Jan. 30, 2024)
Stockholders of Tesla, Inc. brought a derivative action against Elon Musk and six individual Tesla directors, alleging that the directors breached their fiduciary duties by awarding Musk performance-based stock options in January 2018 with a potential $55.8 billion maximum value and $2.6 billion grant date fair value. Following a trial, the Court of Chancery held that the defendants failed to meet their burden to prove the fairness of the compensation plan and granted the plaintiffs’ request to rescind the plan in its entirety. More ›
Chancery Confirms Bad Faith Pleading Standard for Officer Caremark Claims
Segway Inc. v. Hong Cai, C.A. No. 2022-1110-LWW (Del. Ch. Ct. Dec. 14, 2023)
The Caremark doctrine recognizes the duty of oversight for directors of Delaware corporations. Under In re McDonald's Corp. Stockholder Derivative Litigation, 289 A.3d 343 (Del. Ch. Jan. 26, 2023), corporate officers, and not just directors, owe a duty of oversight, at least within the scope of each officer’s responsibilities. This decision confirms that the same pleading standard – one requiring bad faith – applies to officer oversight claims. Here, the plaintiff brought such a claim against its former president arising out of declining sales of the company's transportation devices and an increase in accounts receivable. More ›
Chancery Clarifies Controlling Stockholder Fiduciary Duties in Sears Litigation
In re Sears Hometown and Outlet Stores, Inc. S’holder Litig., C.A. No. 2019-0798-JTL (Del. Ch. Jan. 24, 2024)
Here, a special committee of the board supported a plan to liquidate the company’s floundering business segment and continue operating its more promising business segment. The company’s controlling stockholder opposed the plan and took action to prevent its implementation. He first adopted a bylaw that created hurdles to the plan’s approval. He then replaced two of the three directors serving on the special committee who most favored the plan. He ultimately agreed to acquire the minority stockholders’ interests in a squeeze-out transaction negotiated with the remaining special committee member. More ›
Chancery Dismisses Caremark Oversight Claims
In Re ProAssurance Corp. Stockholder Derivative Litig., Consol. C.A. No. 2022-0034-LWW (Del. Ch. Oct. 2, 2023)
Claims against corporate fiduciaries for breaches of the duty of oversight are colloquially referred to as “Caremark” claims. This decision exemplifies why Caremark claims are among the most difficult to prosecute and “should be reserved for extreme events.” More ›
Chancery Dismisses Double-Derivative Claims for Failure To Plead Demand Futility
City of Hialeah Emps. Ret. Sys. v. Insight Venture Partners, C.A. No. 2022-0846-MTZ (Del. Ch. Dec. 28, 2023)
A venture capital fund invested in two different entities. One of the entities then acquired the other. In the two months following the deal announcement, the acquirer’s stock fell by thirty percent, as markets remained relatively flat. The plaintiff brought six double-derivative claims, alleging that the acquirer’s directors had breached their fiduciary duty by overpaying for the target, and that the venture capital fund was the acquirer’s de facto controller and had benefitted itself via the acquisition at the acquirer’s expense. More ›
