Hamrock: No Caremark liability for natural gas explosion
In City of Detroit Police & Fire Ret. Sys. on Behalf of NiSource, Inc. v. Hamrock, No. CV 2021-0370-KSJM, the Delaware Court of Chancery granted a motion to dismiss duty of oversight claims against an energy company’s directors following a pipeline explosion. Acknowledging that recent caselaw has underlined that, for “mission critical” operations, a “board’s oversight function must be rigorously exercised,” the court nonetheless found that the defendants did not face a substantial likelihood of oversight-related liability sufficient to support a finding of demand futility because: (1) the record showed an active committee overseeing pipeline safety; and (2) that, even though certain red flags were present, none of them would have put a reasonable board member on notice of the risk of a pipeline explosion.
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In re Carvana: Demand is futile when directors are “thick as thieves” with beneficiary of misconduct
The Delaware Court of Chancery, in In re Carvana Co., No. 2020-0415-KSJM (Del. Ch. June 30, 2022), applied the recently adopted Zuckerberg test for demand futility and denied the defendants’ motion to dismiss. The court found that the stockholders in this derivative action pled demand futility by alleging facts showing that two of the six directors had deep personal and professional ties to a third director, defendant Ernest Garcia III (who received a material personal financial benefit in the transaction at issue), such that they could not objectively consider a demand to pursue litigation against Garcia III. The court then found that the plaintiffs stated a viable breach of fiduciary duty claim, and that the transaction at issue, a US$600 million stock offering to Garcia, his father, and a few other select investors during a March 2020 pandemic-related dip in stock prices, would be subject to entire fairness review because it was not approved by a majority of disinterested directors.
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SolarWinds: Caremark liability rejected in cybersecurity oversight claim
In Construction Industry Laborers Pension Fund v. Bingle, (C.A. No. 2021-0940-SG (Del. Ch. Sept. 6, 2022)) (SolarWinds), the Delaware Court of Chancery granted a motion to dismiss a derivative suit against the directors of SolarWinds Corporation for allegedly breaching their duty of loyalty by failing to take steps to prevent a cybersecurity attack, finding that the plaintiffs had not alleged a viable Caremark claim under Delaware law. The court found that “cybersecurity, for online service providers, is mission critical.” However, dismissal was nonetheless warranted because the plaintiffs had not alleged that SolarWinds violated any laws and had not alleged sufficient particularized facts to create an inference that the directors had acted in bad faith in breach of their duty of loyalty, as they were required to plead to demonstrate demand futility under Caremark.
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XRI Investment Holdings v. Holifield: Precedent based on “magic words” leads to inequitable result
In XRI Investment Holdings LLC v. Holifield, C.A. No. 2021-0619-JTL, the Court of Chancery found that defendant Holifield violated a No Transfer Provision in the limited liability company agreement of XRI Investment Holdings LLC when he transferred shares to a special purpose vehicle. Although “the law require[d] this result,” the court found it an “inequitable result” and that the outcome was “disquieting to a court of equity.” The court found that Holifield proved XRI’s acquiescence, but that the LLC agreement’s mandate that unpermitted transfers were “void,” rather than “voidable,” meant that all equitable defenses were inapplicable, according to binding Delaware Supreme Court precedent. As a result, the court indicated that it was bound by pre-existing law and granted judgment in XRI’s favor. In doing so, the court urged the Delaware Supreme Court to reconsider its precedent in connection with any appeal to avoid such inequitable outcomes in the future.
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Authored by Ryan M. Philp, Jon M. Talotta, Bill Regan, Michael Hefter, David R. Michaeli, Allison M. Wuertz, Maura Allen, Elizabeth Cochrane, and Jack Shaked.
