Delaware Business Court insiDer - Gibson Dunn
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
Delaware Business Court Insider
July 17, 2019
‘Blue Bell’ Reaffirms but Does Not Expand the
Boundaries of Oversight Liability
By Jason J. Mendro, Andrew S. Tulumello and Lissa M. Percopo
Plaintiffs and defendants alike
may have thought they felt trem-
ors ripple through the legal sys-
tem last month when, for the
first time, the Delaware Supreme
Court reversed dismissal of deriv-
ative claims based on an alleged
failure to monitor in Marchand
Courtesy photo
v. Barnhill, Case No. 533, 2018,
2019 Del. LEXIS 310 (June 18,
2019), or “Blue Bell.” Prior to the (L to R) Jason J. Mendro, Andrew S. Tulumello and Lissa M. Percopo of Gibson, Dunn & Crutcher.
Blue Bell decision, the court has
repeatedly recognized that claims to monitor a company’s central for oversight liability under
asserting that directors are liable compliance risks, see Blue Bell, Caremark. It has been settled
for allegedly failing to monitor 2019 Del. LEXIS 310, at *36-37. Delaware law for decades that
or oversee a corporation—often It can be expected that plaintiffs “the necessary conditions predi-
referred to as Caremark claims— will prominently feature Blue Bell cate for oversight liability are the
rest upon what is “possibly in virtually all briefs opposing directors utterly failed to imple-
the most difficult theory in dismissal of Caremark claims for ment any reporting or informa-
corporation law upon which a years to come. A careful review of tion system or controls; or hav-
plaintiff might hope to win a the Blue Bell decision, however, ing implemented such a system
judgment,” as in Stone v. Ritter, reveals that it contains nothing or controls, consciously failed
911 A.2d 362, 372 (Del. 2006) seismic. to monitor or oversee its opera-
(quoting In re Caremark Inter- Properly understood, Blue Bell tions thus disabling themselves
national Derivative Litigation, 698 does not lower the high bar for from being informed of the risks
A.2d 959, 967 (Del. Ch. 1996)). pleading oversight liability. In or problems requiring their atten-
Now, in a unanimous decision reversing dismissal, the court tion,” see Stone, 911 A.2d at 370
authored by Chief Justice Leo held, first, that the plaintiff (applying Caremark). Blue Bell
E. Strine Jr. just days before he had pleaded demand futility is a straightforward application
announced his retirement, the by alleging that a majority of of the first prong of this test. Its
court has confirmed that such the company’s directors lacked holding will have little impact on
claims are viable when a board independence, and, second, that most motions to dismiss Caremark
fails to implement any system the plaintiff had stated a claim claims for at least two reasons.
Delaware Business Court Insider July 17, 2019 First, the court’s reasoning must management to address the issue. been a conscious abdication of be confined to the extraordinary Within two months, the compa- appropriate oversight duties. facts of the Blue Bell case, where ny was forced to recall all of its Moreover, the court’s decision the board’s inattention to “central products. Tragically, three of its also aligns with precedent compliance risks” jeopardized the customers died from the bacteria. signaling that heightened viability of the company and the The company suffered a com- scrutiny may be applied where lives of its customers. The court plete operational shutdown, laid directors are inattentive to issues emphasized that Blue Bell is a off a third of its workforce, and that obviously imperil human “monoline company that makes a spiraled into a liquidity crisis. In safety. Thus, the circumstances single product—ice cream.” The light of these striking allegations, alleged in Blue Bell are consistent company’s management became the court reasoned that the com- with those in which Delaware aware that a potentially fatal bac- pany’s directors could not have courts have long suggested that teria, listeria, was present in the responsibly allowed themselves Caremark liability may arise. company’s ice cream production to remain oblivious for years to Although it is predictable facilities. Federal and state regu- these critical risks, which impli- that plaintiffs will attempt to lators had cited multiple food cated the core of the company’s analogize innumerable corporate safety issues at the company’s fa- operations. misfortunes to the near collapse cilities, and both internal reports Although reversing dismiss- of Blue Bell, nothing in the and a report from a private third al of Caremark claims was an decision hints that there could be party observed that listeria was unprecedented outcome, the Caremark liability in the vast run present at its facilities. In fact, court’s reasoning was wholly of cases where a corporate harm Blue Bell received 10 positive consistent with its precedent. The will not concern a hazard that tests for listeria in a single year. court had repeatedly made clear was both obvious and critical Nonetheless, management’s re- that Caremark liability is limited to the company’s operations, or ports to the board in that time to instances of bad faith, see, e.g., it will be clear that the board period allegedly relayed positive Stone, 911 A.2d at 370, and Blue had established at least some information about sanitation and Bell is no exception. The court reporting controls in an effort to made no reference to listeria, took great pains to emphasize become informed of such risks. and the board implemented no that the board must have known Second, although the court held reporting controls in an effort to that it needed to monitor the that the plaintiff stated a claim ensure that it would become in- safety of Blue Bell’s ice cream under Caremark, it did not excuse formed of this and similar risks. because that was the only product demand based on the strength of Blue Bell’s board learned of this the company produced; in the that claim. Derivative plaintiffs issue for the first time only after court’s words, “food safety was are, of course, required to make the company recalled some of its essential and mission critical.” a demand on the board of direc- products. At that point, there Even after the board was told tors before asserting claims on a had been two years of evidence that the company had to recall corporation’s behalf, unless they that listeria was a growing prob- some of its products due to a satisfy the stringent burden of lem. Even then, the board did listeria outbreak, the board failed pleading that a demand would be not convene emergency meetings to become actively engaged in futile. In many derivative cases, or require constant updates; it in- monitoring the problem. Its plaintiffs attempt to avoid the stead deferred to the company’s failure to do so could only have demand requirement by arguing
Delaware Business Court Insider July 17, 2019
that the potency of their claims standard vocabulary in plaintiffs in resolving the issue. It is not,
alone disables the board from legal briefs, it does not change the however, the time to assume
reviewing a demand properly. law. It does not obligate directors that the floodgates of Caremark
Delaware courts approach that and officers to predict and pre- liability have swung open.
theory with extreme skepticism. vent all traumas companies face.
And rightly so: If they credited It does not impose liability when Jason J. Mendro is a litigation
the “bootstrapping” argument companies incur injuries unrelat- partner in Gibson, Dunn &
that derivative claims themselves ed to their most central compli- Crutcher’s Washington, D.C., office
suffice to excuse demand, then ance risks. It does not require that and a member of the firm’s securities
demand would be excused in ev- directors’ efforts to learn about litigation steering committee.
ery case. Delaware courts have critical risks will always succeed Andrew S. Tulumello is a litigation
refused to nullify the demand or ever succeed immediately. It partner in the firm’s Washington,
requirement that way. Accord- does not deprive directors of the D.C., office and a member of the
ingly, they hold that derivative right to rely on management to firm’s appellate and constitutional law
claims will excuse demand only address risks, nor does it require practice group and securities litigation
in rare cases in which the plain- that directors or officers will in- practice group, and co-chair of the
tiffs plead specific allegations of variably prevail in mitigating risks firm’s sports law practice group.
fact establishing that their claims once they are identified. Rather, Lissa M. Percopo is an of
subject a majority of the board to Blue Bell applies settled principles counsel in the firm’s Washington,
a “substantial likelihood” of per- to atypical facts and stands as a D.C. office, and a member of the
sonal liability. This is among the reminder that directors must litigation department and securities
most stringent pleading burdens take reasonable steps to become litigation practice group.
in the law. Significantly, Blue informed of the most vital threats
Bell did not hold that this burden to the corporations they serve.
had been satisfied. Rather, it In the wake of the Blue Bell
held that demand was excused decision, it is advisable for boards
for the unrelated reason that to take stock of the “central
a majority of the board lacked compliance risks” facing their
independence. Having found companies and assess whether
that demand was futile, the court they are receiving sufficient
went on to consider only whether reports about those risks. It is also
the plaintiff had stated a legally advisable to consider whether the
viable Caremark claim under a corporation’s minutes sufficiently
notice pleading standard. That document director attention
is the lowest pleading burden. to those risks. Upon notice of
Therefore, Blue Bell reasoning is particularly severe problems, the
largely confined to cases in which board should consider whether
demand is excused on grounds to implement heightened
unrelated to the risk of director reporting controls, including
liability. additional board meetings, in Reprinted with permission from the July 17, 2019 edition of
DELAWARE BUSINESS COURT INSIDER © 2019 ALM
In sum, although Blue Bell an effort to ensure that it is Media Properties, LLC. All rights reserved. Further duplication
without permission is prohibited. For information, contact 877-257-
promises to become part of the aware of management’s progress 3382 or reprints@alm.com. # DBCI-07172019-408886-GibsonYou can also read
