Delaware Business Litigation Report

Chancery Finds That Books and Records Incorporated by Reference in Complaint Demonstrate the Lack of a Valid Caremark Claim

Joel Newman v. KKR Phorm Investors, L.P., et al. C.A. No. 2022-0310-NAC (Del. Ch. Aug. 31, 2023).
At the motion to dismiss stage, Delaware courts will consider the facts alleged in the complaint as well as the documents incorporated into and integral to it. Under Court of Chancery Rule 23.1, a derivative plaintiff is entitled only to reasonable inferences drawn from the facts asserted and the documents incorporated. Here, the Court reviewed the books and records incorporated by reference in the complaint and determined that the plaintiff failed to plead demand futility.

Defendants argued that the complaint in this case had to be dismissed because the plaintiff failed to allege with particularity that directors’ lack of independence supported that a pre-suit demand should be excused. The Court agreed that the complaint did not rebut the presumption of the directors’ independence. The Court explained that the potential presence of a controller by itself did not excuse demand. The plaintiff did not allege particularized facts suggesting that the directors acted in bad faith either. On the contrary, the documents the plaintiff obtained through a Section 220 demand that were incorporated by reference supported the opposite proposition and contradicted the allegation of bad faith. The plaintiff alleged that the directors breached their duty of oversight by disregarding a Related Person Transactions Policy. The documents cited in the complaint demonstrated, however, that the directors reviewed and considered the Policy. The Court distinguished this case from its earlier Walmart decision where the complaint pleaded a Caremark claim based on the board’s multi-year-long conscious disregard of specific obligations. The plaintiff here claimed that the documents that contradicted his assertion were false, but the Court determined that such a conclusion did not “logically flow” from the documents and complaint. Accordingly, the Court dismissed the complaint for failure to plead demand futility under Court of Chancery Rule 23.1.

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