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Chancery Dismisses Derivative Claims Alleging Insider Trading and Misleading Disclosures for Failure to Plead Demand Futility


In re Zimmer Biomet Hldgs., Inc. Deriv. Litig., C.A. No. 2019-0455-LWW (Del. Ch. Aug. 25, 2021)
Under Court of Chancery Rule 23.1, a stockholder-plaintiff may only bring a derivative suit on behalf of a company if the plaintiff (i) first makes a demand on the board to bring suit and is wrongfully refused, or (ii) adequately pleads that a demand would have been futile because the directors were incapable of impartially considering it. Here, the court granted the defendants’ motion to dismiss, because the stockholder-plaintiff failed to allege facts that a majority of the board of directors – who concededly were otherwise disinterested and independent – faced a substantial risk of personal liability.

The nominal defendant corporation was a manufacturer of medical devices. After an inspection by federal regulators identified compliance problems, it stopped shipments of products, reported disappointing quarterly results, reduced its guidance for the next quarter, and suffered a fourteen percent drop in its stock price. The plaintiff brought derivative claims, asserting that the company’s officers and directors knew about regulatory compliance challenges but concealed those challenges while simultaneously helping private equity funds sell their holdings of the company’s stock. The defendants moved to dismiss.

 The plaintiff acknowledged that eight of the eleven directors were independent, received no special benefit from the challenged trades, and had no ties to the private equity funds that sold their stock. The plaintiff nevertheless argued that demand was futile because a majority of the directors faced a substantial likelihood of liability in the suit.

Because the company had a 102(b)(7) exculpation provision in its charter, the plaintiff had to plead with particularity facts stating a claim for breach of the duty of loyalty. The court found that the plaintiff had failed to plead specific facts to support a reasonable inference that the directors acted in bad faith, intentionally concealed material information knowingly facilitated insider trading, or deliberately ignored “red flags.” The court explained that the plaintiff’s allegations were insufficient to link information that the directors learned about continuing compliance challenges with any materially misleading statements the directors were responsible for making, or to any awareness that the compliance challenges might result in financial harm to the company at the time the stock sales were made. The plaintiff also failed to allege board-level involvement in preparing the disclosures, or that the private equity funds’ designees to the board shared any material, nonpublic information with the funds prior to their stock sales. As to the plaintiff’s Caremark claim for failure of oversight, the court reasoned that the complaint confirmed the monitoring or reporting systems in place and efforts undertaken to address compliance issues, rather than allege a lack of oversight. Accordingly, the court dismissed the complaint in its entirety for the failure to adequately plead demand futility.

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