Delaware Business Litigation Report

Chancery Dismisses Derivative Action Based On Alleged Liability Under DGCL § 174 For Stock Repurchases and Dividends

In re The Chemours Co. Deriv. Litig., C.A. 2020-0786-SG (Del. Ch. Nov. 1, 2021)
Broadly speaking, Sections 160 and 173 of the DGCL prohibit a corporation from repurchasing stock or issuing dividends if doing so would exceed the corporation’s surplus. Both Sections 160 and 173 are enforceable under Section 174, which provides that directors “under whose administration” a “willful or negligent” violation of Section 160 or 173 occurs are “jointly and severally liable” to the corporation. Here, the Court of Chancery rejected a challenge to dividend and stock repurchases premised upon directors’ alleged incorrect assessment of potential environmental liabilities. 

Following its spin-off from DuPont, Chemours made stock repurchases and issued dividends, which its board justified by using surplus calculations based upon generally accepted accounting principles (“GAAP”) presented by officers and experts. In this case, plaintiffs brought derivative claims for the dividend and repurchase transactions, asserting that demand was futile because the directors faced liability under Section 174.

Upon the directors’ motion, the Court of Chancery dismissed the case. The Court cited Klang v. Smith’s Food & Drug Centers, Inc., 1997 WL 257463 (Del. Ch. May 13, 1997), aff’d, 702 A.2d 150 (Del. 1997), in deferring to the board’s surplus calculations, because the allegations of the complaint did not show that the directors lacked a “reasonable belief” as to the “present values” of the company’s assets and liabilities, or that their judgment was so far off the mark as to constitute fraud. Among other things, the plaintiffs did not plead with particularity that the company was ever insolvent. Thus, the Court concluded that the directors’ actions did not violate Section 174. The Court also observed that Section 172 provides that directors are “fully protected” from liability if they rely in good faith upon corporate records, officers, or experts as to “the value and amount” of assets and liabilities, and “other facts pertinent to the existence and amount of surplus[.]” The Court held that is what occurred when, according to the complaint, the directors relied upon GAAP and their advisors when deciding to repurchase stock and issue dividends.

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