In re Metlife Inc. Derivative Litigation, Consol. C.A. No. 2019-0452-SG (Del. Ch. Aug. 17, 2020)
Shareholders seeking relief for alleged harm to a Delaware corporation must comply with Delaware’s pre-suit demand requirement by either making a demand on the board of directors to take action respecting the potential claims, or initiating suit themselves and adequately pleading facts excusing pre-suit demand as futile.
Under Rales v. Blasband, when a shareholder challenges a board’s inaction, a means of establishing demand futility is to allege particularized facts showing that a majority of directors face a “substantial likelihood of personal liability” for a failure of oversight under Caremark. As this decision demonstrates, that is a notoriously difficult path for plaintiffs.
In Metlife, shareholder plaintiffs alleged derivative breach of fiduciary duty claims against the board of directors related to Metlife’s business operation of undertaking other businesses’ fixed-benefit pension obligations and weaknesses in the company’s related long-standing policies that led to millions of dollars in fines and restitution payments. The plaintiffs alleged that the director defendants breached their fiduciary duties by knowingly or intentionally (i) failing or refusing to implement regulator-mandated measures, and (ii) failing to establish or monitor reasonable systems and controls to ensure the identification of problematic compliance issues. The plaintiffs alleged that the board had “actual or constructive knowledge that [the corporation’s] internal controls were inadequate” to comply with regulations and “chose to do nothing about these deficiencies.” According to the plaintiffs, the board “consciously and in bad faith chose not to cause the Company to act in accordance with positive law.” Attempting to plead demand futility under this Caremark theory of liability, the plaintiffs alleged that a majority of the board served at the time of the alleged failure of oversight, and so lacked independence to consider the demand.
Based on these allegations, the Court of Chancery concluded that the complaint broadly sought to assert theories for breach of the duty of oversight under both prongs of Caremark. To prove that a board failed its duty of oversight under the Caremark rubric, plaintiffs must show either that “(a) the directors utterly failed to implement any reporting or information system or controls; or (b) having implemented such a system or controls, consciously failed to monitor or oversee its operations thus disabling themselves from being informed of risks or problems requiring their attention.” When the directors are exculpated from liability for breach of care, as were the directors in Metlife, director liability for an oversight claim under Caremark requires plaintiffs to show that directors acted in bad faith, essentially knowingly.
The Court found the plaintiffs’ allegations insufficient under both prongs of Caremark. As to the first prong, the Court observed that it was “clear from the Complaint that the [corporation] had an extensive network of internal controls.” And the plaintiffs’ claim therefore was not a failure to establish compliance monitoring systems, but “really that the Board consciously failed to oversee and implement controls they knew were necessary to regulatory compliance ....”
As to the second prong, the Court found that the complaint lacked sufficient particularized allegations from which it could reasonably infer that a majority of the directors had actual knowledge of and in bad faith ignored the various alleged red flags of potential non-compliance cited by the plaintiffs. In doing so, the Court declined to find the directors had constructive knowledge of the alleged red flags. As the Court observed, Delaware law generally rejects constructive knowledge of unlawful conduct as a theory in demand futility cases. Accordingly, demand was not excused and the plaintiffs’ breach of fiduciary duty claims were dismissed for failure to plead demand futility.