In the recent opinion by the Delaware Supreme Court of Chancery in City of Birmingham Retirement and Relief System v. Good, No. 16, 2017 (Del. Supr. Dec. 15, 2017), the High Court held that stockholder plaintiffs failed to adequately plead demand futility in the connection with Caremark claims asserted against the company’s board of directors.  The majority’s en banc opinion should be read by any practitioner seeking to understand the demand futility analysis under Delaware law.

The complaint was filed as a derivative action on behalf of Duke Energy Corporation (“Company”).  In May 2015, the Company pled guilty to nine misdemeanor criminal violations of the Federal Clean Water Act and paid a fine exceeding $100 million. The plaintiffs, stockholders of Duke Energy, filed a derivative suit in the Court of Chancery against certain of Duke Energy’s directors and officers.  Plaintiffs sought to hold the directors personally liable for the damages the Company suffered from the spill.

The High Court agreed with the Court of Chancery that the stockholder plaintiffs did not sufficiently allege that the directors faced a substantial likelihood of personal liability for a Caremark violation.  Instead, the Court found that the directors at most faced the risk of an exculpated breach of the duty of care. Thus, the stockholders were required to make a demand on the board to consider the claims before filing suit.  In granting the defendant directors’ motion to dismiss, the Court noted case law explaining that Delaware courts routinely reject conclusory allegations that because illegal behavior occurred, the board must have known that internal controls were been deficient.

Carl D. Neff is a partner with the law firm of Fox Rothschild LLP.  Carl is admitted in the State of Delaware and regularly practices before the Delaware Court of Chancery, with an emphasis on shareholder disputes. You can reach Carl at (302) 622-4272 or at cneff@foxrothschild.com.