Segway, Inc. is a personal transportation device designer and manufacturer. In April 2015, it was acquired by a subsidiary of Ninebot (Beijing) Tech Co., Ltd. Following its acquisition, Segway maintained its own operations, including its own board of directors, officers, employees, and financial and accounting systems.
Judy Cai was appointed as Segway’s interim president in December 2015 and promoted to president in 2018. During her time at Segway, Cai worked as its in-house accountant and was responsible for Segway’s tax matters. Following its acquisition in 2015, Segway suffered a decline in sales of its branded products, began downsizing its operations, and by 2020, Segway closed its headquarters and laid off nearly all of its employees. Cai’s employment was terminated in November 2020.
During Ninebot’s integration of Segway’s financial information into Ninebot’s systems – and after Cai’s termination – Ninebot discovered that the information Cai provided was incorrect and did not match Segway’s actual numbers in its financial records, including US$5 million in accounts receivable that was “not properly recorded and/or booked.” Segway brought suit against Cai, alleging a Caremark claim for breach of fiduciary duty for knowing, but failing to address, customer issues that caused an increase in Segway’s accounts receivable. Cai moved to dismiss the single breach of fiduciary duty claim in the amended complaint.
The Court of Chancery granted Cai’s motion to dismiss the Caremark claim, finding that Segway did not allege facts sufficient “to support a reasonable inference that the fiduciary acted in bad faith.” The Court noted that “[u]nder Caremark, bad faith can be established when fiduciaries (1) ‘utterly fail to implement any reporting or information system or controls,’ or (2) ‘having implemented such a system or controls, consciously fail to monitor or oversee its operations,’ which disables them ‘from being informed of risks or problems requiring their attention.’” The court interpreted Segway’s claim as alleging breach of fiduciary duty under the second prong of Caremark based on allegations that Cai “consciously disregarded” certain “red flags” in Segway’s accounting and failed to advise the appropriate parties of such anomalies.
The court, however, found that Segway’s allegations were “an ill fit” for a Caremark claim because there were no “red flags” or “wrongdoing” alleged. For example, Segway did not allege that Cai overlooked any accounting improprieties, fraud, or other material legal violations. The court ultimately concluded the allegations amounted to ordinary business issues that did not rise to the extraordinary case of bad faith required under Caremark. The court cautioned against using the Caremark doctrine as “a tool to hold fiduciaries liable for everyday business problems,” stating instead that it “is intended to address the extraordinary case where fiduciaries’ ‘utter failure’ to implement an effective compliance system or ‘conscious disregard’ of the law gives rise to a corporate trauma.”
In rejecting granting Cai’s motion to dismiss, the court noted that “Segway appears to believe that the high bar to plead a Caremark claim is lowered when the claim is brought against an officer.” The court rejected Segway’s position, finding it to be “a distressing reading of our law.” The Segway decision reaffirms that a Caremark claim (against officers and directors, alike) remains “possibly the most difficult theory in corporation law upon which a plaintiff might hope to win a judgment” that requires bad faith.
Authored by Allison M. Wuertz, Ann Kim, and Jordan D. Teti.
