Chancery Dismisses Caremark Claim Against Energy Company Alleging Failure of Board Oversight Related to Fatal Pipeline Explosion
City of Detroit Police and Fire Retirement System v. Hamrock, C.A. No. 2021-0370-KSJM (Del. Ch. June 30, 2022)
Stockholder plaintiff filed a derivative suit on behalf of an energy company alleging that certain of the company’s former and current directors were liable for oversight failures leading to the fatal explosion of an over-pressurized gas pipeline. When the defendants moved to dismiss for failure to make a demand on the board, the plaintiff argued that demand was excused because a majority of the demand board faced a substantial likelihood of liability for oversight failures based on the following three theories of Caremark liability: (1) the board’s utter failure to implement a pipeline safety monitoring or reporting system; (2) the board’s failure to acknowledge “red flags” that put it on notice of the company’s numerous violations of pipeline safety laws; and (3) the board’s knowing encouragement of legal violations in the pursuit of corporate profit. The Court rejected all three of the plaintiff’s theories of Caremark liability and dismissed the action for failure to make a demand. The Court reasoned as follows: (1) according to the plaintiff’s own allegations, the company had set up a pipeline safety monitoring and reporting system which included a committee specifically tasked with pipeline safety that was active, therefore the plaintiff had not adequately pled “utter failure” to set up such a system; (2) any causal connection between the “red flags” identified by the plaintiff and the explosion were too tenuous to put the board on notice of the corporate trauma that occurred; and (3) plaintiff had not adequately pled that the board was “in the business” of encouraging violation of the law for profit because, according to plaintiff’s own allegations, the company actually discouraged legal violations through the formation of several committees tasked with regulatory compliance.