Delaware Business Litigation Report

Chancery Dismisses Derivative Action Arising from $1.2 Billion Stock Sale Based on Plaintiffs’ Failure to Plead Demand Futility

In re Kraft Heinz Co. Deriv. Litig., Cons. C.A. No. 2019-0587-LWW (Del. Ch. Dec. 15, 2021)
The Court of Chancery dismissed an insider-trading action on the grounds that plaintiffs failed to plead that a majority of a company’s board was not disinterested or independent. By way of background, an investment firm held 24 percent of a publicly-traded Delaware company and rights to three seats on an eleven-member board. At an August 2018 meeting, the board received information that the company likely would miss annual financial targets. Four days later, the investment firm sold nearly a third of its stake, for more than $1.2 billion. The stock sale occurred after the investment firm provided the company with a statement that the firm was not in possession of any material, nonpublic information, and after the company’s board approved lifting insider restrictions that permitted the firm to sell the shares. Three months later, the company disclosed disappointing financial results, and the stock price dropped significantly.

Plaintiffs filed derivative claims that the investment firm and certain dual fiduciaries among the firm and the company breached their fiduciary duties in connection with alleged insider trading. Plaintiffs pled that demand was futile because a majority of the board was not independent of the investment firm.

The parties agreed that three of the eleven directors were not independent, but that two other directors were disinterested and independent. For the remaining six directors, the Court analyzed the disinterest and independence of each director to assess demand futility with respect to each director. The Court ruled that at least four of the remaining directors could exercise independent and disinterested judgment. Plaintiffs failed to plead particularized allegations explaining why one remaining director’s charitable and investment connections to the investment firm should be considered disabling. For two other remaining directors, the plaintiffs’ argument—that the directors had been appointed to the board by another major stockholder, that the major stockholder had a history of co-investment with the investment firm, that there had been a shareholders’ agreement between these two stockholders, and that a key principle of the major stockholder had a personal relationship with the founder of the investment firm—did not rise to the level of financial reliance or close personal relationships to rebut the presumption of independence, particularly because those considerations were one step removed from the directors themselves. For the fourth remaining director, whether he was not considered independent for purposes of Nasdaq listing requirements did not mean that he was not independent for purposes of demand futility. Further, the plaintiffs’ allegations as to the director’s salary or the business activities of his son were insufficient to rebut the presumption of his independence.

Having concluded that at least four directors in addition to the two concededly-independent directors were independent and disinterested—and thus that a majority of the board was disinterested and independent—the Court held that demand was not excused, and dismissed the action based on the failure to plead demand futility under Court of Chancery Rule 23.1.

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