Duty of Oversight of Officers–Post-McDonald’s Action in Court of Chancery

Nearly one year ago we reported in this blog on the Court of Chancery’s decision in In re McDonald’s Corp. S’holder Litigation, 289 A.3d 343 (Del. Ch. 2023), in which the court affirmatively held that officers of Delaware corporations owe duties of oversight (often called, Caremark duties), and specifically for matters that would fall within their managerial purview.  In a recent decision granting a motion to dismiss in Segway Inc. v. Hong Cai a/k/a Judy Cai, C.A. No. 2022-1110-LWW (Del. Ch. Dec. 14, 2023), Vice Chancellor Will has provided practitioners counselling corporate officers with additional guidance on how the Court of Chancery will apply the duty of oversight to officers (as opposed to directors)—particularly when reviewing the sufficiency of claims pled against such officers.

This decision makes clear that “[d]espite a proliferation of modern jurisprudence, bad faith remains a necessary predicate to any Caremark claim.”  This is so no matter whether the fiduciary whose conduct is challenged is an officer or a director.  While the McDonald’s decision “emphasized that—barring extreme facts—an officer’s duty of oversight would only extend to matters within the officer’s remit,” that decision did not “craft a lower standard for oversight claims brought against officers.”  Because the complaint in this case did not sufficiently plead  “potential wrongdoing (much less within [the officer’s] purview),” the Vice Chancellor dismissed the claims.

In closing the Memorandum Opinion, Vice Chancellor Will summarized the current state of the law as it pertains to the Caremark duties owed by officers of Delaware corporations as follows:

The Caremark doctrine is not a tool to hold fiduciaries liable for everyday business problems.  Rather, 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.  These tenets of our law persist regardless of whether a Caremark claim is brought against a director or an officer.  Officers’ management of day-to-day matters does not make them guarantors of negative outcomes from imperfect business decisions.

* * *

At a minimum, a plaintiff pursuing an oversight claim against an officer would need to demonstrate that the officer failed to make a good faith effort to monitor central compliance risks within her remit that pose potential harm to the company or others.

To the extent officers of Delaware corporations or their advisors might have read the earlier McDonald’s decision as creating an easier path to liability for duty of oversight claims for officers as opposed to directors, this recent decision should quiet those concerns.

Do New Delaware General Corporation Law Exculpation Amendments Trigger a Mandatory Class Vote for Changes to Charters?

In August 2022, a number of amendments to the provisions of the Delaware General Corporation Law (DGCL) went into effect. One amendment of note is the extension of Section 102(b)(7)’s exculpation provisions, which now permit corporations to eliminate or limit the personal liability of specified officers for direct claims of breach of the fiduciary duty of care. As a result, several Delaware corporations have amended their charters to extend the Section 102(b)(7) clauses to those senior corporate officers specified under the newly amended statute. Naturally, these actions bring a new issue for the courts to determine: What is the requisite stockholder approval to implement these charter amendments?

 

To read the full Alertvisit the firm website

Demand Futility Saves McDonald’s Former Executive from Potential Caremark Liability

We discussed in a prior Alert Vice Chancellor J. Travis Laster’s extension of oversight duties and liability therefrom upon corporate officers. While this decision provided answers to long-standing questions relating to the extension of oversight duties, it also brought about concerns regarding the potential increase of exposure to liability. Luckily for those who shared in this concern, Vice Chancellor Laster reminded us all that the requirement to plead demand futility under Court of Chancery Rule 23.1 will continue to serve as an important hurdle to a plaintiff’s success in the courtroom. In a short order released this month, Vice Chancellor Laster dismissed the same breach of oversight claims that previously withstood Court of Chancery Rule 12(b)(6) muster.

To read the full Alertvisit the firm website.

Consent to Jurisdiction Clauses–The Sequel

We recently wrote a post on this page discussing a new decision of the Court of Chancery holding that a consent to jurisdiction clause in a corporate acquisition agreement was not drafted such that its scope covered claims for breach of fiduciary duty–the lesson for drafters of agreements being to carefully consider how the provision being drafted actually covers the intended scope and types of claims.

In a decision issued on February 28, 2023, the Court of Chancery issued its decision in Golden v. Shootproof Holdings, LP, et al., C.A. No. 2022-0434-MTZ, in which the court considered whether the consent to jurisdiction clause in a merger agreement covered individuals (officers of the buying entities) who were not signatories to, or parties to, the merger agreement at issue.  The court found that it did not have personal jurisdiction over the two individual defendants, both residents of Georgia, because it found–as non-parties to the merger agreement–they had not consented to jurisdiction in Delaware.  The court, therefore, granted the individual defendants’ motion to dismiss.

In arriving at this result, the court noted that it may enforce a forum selection clause against those “who are not otherwise individually bound by the agreement” where it finds all three of the following present: “(i) the agreement contains a valid forum selection provision; (ii) the non-signatory has a sufficiently close relationship to the agreement  . . .; and (iii) the claim potentially subject to the forum selection provision arises from the non-signatory’s standing related to the agreement.”  In the litigation, only factor (ii) was contested.

The court ultimately found that the individual defendants were not intended third-party beneficiaries of the merger agreement and would not be bound by the principles of estoppel, and thus, they had not consented to the jurisdiction of Delaware’s courts.

As with last week’s post, this new decision highlights how the Delaware courts are content to apply consent to jurisdiction clauses–but will only do so where the clause clearly articulates that it covers both the intended parties and the intended conduct.

Delaware Choice of Law Clauses for Restrictive Covenants in Agreements

The Delaware Business Court Insider recently published my analysis of a decision of the Court of Chancery where the court declined to apply a Delaware choice of law provision in a dispute related to restrictive covenants where the application of Delaware law would thwart an express policy of the state (here, Alabama) with the greater interest in the dispute.  That article may be read here.

Contract Drafters: Consider the Scope of Your Consent to Jurisdiction Clauses!

A new decision from Delaware’s Court of Chancery highlights how transactional lawyers are granted wide latitude to seek, by contract, to invoke the jurisdiction of Delaware’s renowned business and commercial courts, where jurisdiction might not otherwise lie, through the use of a consent to jurisdiction clause in a contract or agreement.  But in doing so, practitioners should consider carefully how the parties will ultimately define the scope and reach of such consent.  In ActiGraph Holdings, LLC, et al. v. Cyntech, Inc. et al., C.A. No. 2021-0507-KSJM (February 14, 2023), the Chancellor found that a consent to jurisdiction clause in a purchase agreement for the sale of a business (a Florida LLC) did not subject the former CEO of the sold business to the jurisdiction of the Delaware courts for purposes of claims of breach of fiduciary duty in the management and affairs of the Florida LLC.

The pertinent language in the consent to jurisdiction clause stated: “Each party hereby irrevocably submits to the jurisdiction of the Court of Chancery of the state of Delaware or any federal court of competent jurisdiction in the state of Delaware, solely in respect of the interpretation and enforcement of the provisions of this agreement and of the documents referred to in this agreement . . . .” (emphasis added by Court)  The Court held that the the emphasized language in the consent to jurisdiction clause did not cover claims for breach of fiduciary duty, and therefore found that the Court did not have personal jurisdiction over the former CEO (a Florida resident) for such claims.

Clarity at Last? Court of Chancery Confirms Corporate Officers Owe Oversight Duties

Since Chancellor William T. Allen’s seminal ruling in In re Caremark International Inc. Derivative Litigation, the question of the duties owed by corporate officers, not directors, has remained unclear. For years, practitioners, academics and the courts have grappled with this question and others. Recently, Vice Chancellor J. Travis Laster answered some of these questions and provided long-needed clarity, holding that corporate officers “owe a fiduciary duty of oversight as to matters within their areas of responsibility.”  While this opinion provides answers to the questions many have been asking, it also raises concerns.

To read the full Alert, visit the firm website.

Seek (In Delaware), and Ye Shall Find Corporate Books and Records

The right of a stockholder of a Delaware corporation to inspect the books and records of the company is codified in Section 220 of the Delaware General Corporation Law.  In recent years, and for a number of reasons, stockholders have been exercising this inspection right in ever increasing numbers (I have four clients addressing demands to inspect books and records as I write).  A recent decision of the Court of Chancery (Juul Labs, Inc. v. Grove, C.A. No. 2020-0005-JTL) is worth highlighting–less for the substantive law related to Section 220 inspections of books and records and more its discussion of certain “gatekeeping” matters related to litigation to enforce these stockholder inspection rights.

The noteworthy holdings and outcomes in the Juul Labs decision are the following:

  • Because Juul Labs is a Delaware corporation, and a demand by a stockholder to inspect the books and records of a corporation are a matter of internal affairs for that entity, the stockholder could not use a similar California statute (even though Juul’s principal place of business is in California) as a basis upon which to demand the inspection of books and records;
  • A stockholder of a Delaware corporation must look solely to 8 Del. C. Sec. 220 for its statutory rights to inspect the books and records of a Delaware corporation in which they own shares; and
  • The court left open the question whether a stockholder of a Delaware corporation can contractually waive the statutory rights to inspection of books and records granted by Section 220.

Thus, while it is clear that Delaware corporations and their legal advisors can take greater comfort that disputes over stockholder access to corporate books and records can and will be heard in Delaware, the broader question of whether Delaware corporations can affirmatively contract with their stockholders to limit or obviate such inspection rights remains to be answered.

Yet Another Minute About Minutes

Photo by @spokane1997

The minutes of corporate board meetings are, candidly, too often treated as an afterthought.  This can lead to the official records being deemed not much of a record at all when later reviewed.  Indeed, a reviewing court might even draw certain inferences based on what it finds, or does not find, in the minutes.  I have discussed in this blog several times (here and here) certain nuances that go into the craft that is drafting a set of board minutes that properly memorialize the directors’ fealty to their roles as fiduciaries.

A recent opinion from the Court of Chancery demonstrates why, even at the time of setting the agenda for a board meeting, the corporate secretary should be cognizant of how that meeting will be memorialized in the corporate books and records.  In an April 27, 2020, Memorandum Opinion in Hughes v. Hu, et al., C.A. No. 2019-0112-JTL, the Vice Chancellor drew certain plaintiff-friendly, pleadings-stage inferences in ruling on a motion to dismiss based on what was–and more importantly, what was not–included in the corporate board minutes regarding the topics in dispute (this Blog addressed the substantive matters in dispute here).

Critical to the court’s analysis was that prior to filing his complaint, the stockholder plaintiff had exercised his rights under Section 220 of the Delaware General Corporation Law to examine the books and records of the company.  While the company had produced for inspection some books and records, the company stipulated that “any remaining materials requested by Plaintiff either do not exist or had been withheld on privilege grounds.”  Thus, the court held that “if the Company failed to produce a document that it would reasonably be expected to possess if a particular event had occurred, then the plaintiff is entitled to a reasonable inference that the event did not occur.”

The court used that holding as the basis for drawing a number of inferences in the plaintiff’s favor based on what was not included in or with the corporate minutes.  For instance, in multiple instances where the corporate minutes referred to a document or presentation that the directors purportedly reviewed, but where no copy of such document was produced for inspection with the minutes in the Section 220 proceedings, the court inferred that such materials did not exist, and therefore were not reviewed by the directors in carrying out their duties.

Moreover, the court also drew substantive inferences in plaintiff’s favor of the anticipated contents of documents referenced in the minutes but not appended to or presented with the such minutes.  For instance, a set of minutes stated that the Audit Committee approved a “Policy of Related-Party Transactions Relating to JV Shareholder,” but no such policy had been presented with the corporate books and records for inspection by the stockholder.  Thus, the court held: “It is reasonable to infer at the pleading stage that the policy did not place meaningful restrictions on management.”

Finally, it is worth noting that  the court also highlighted in multiple places throughout the opinion the overall landscape presented by the corporate books and records.  Specifically, the court noted relatively long gaps between meetings of the audit committee, the types of tasks the directors were purportedly undertaking at such meetings, and the actual length of the meetings themselves.  For example, the court held it was “reasonable to infer that with the Audit Committee having not met for almost a year, there was no possible way that the Audit Committee could have fulfilled all of the responsibilities it was given under the Audit Committee Charter during a fifty-minute meeting.”

This opinion sheds light on the potential issues that might arise where corporate secretaries (or their counsel) have allowed the task of recording minutes of board meetings to become a mere footnote in the process of keeping accurate and meaningful corporate books and records.  Based on this opinion, corporate record-keepers might:

  • In setting the agenda, give thought to how the meeting is going to flow with an eye to what the written minutes will ultimately record for history.  That is, consider the order in which topics are discussed, the relative nature and materiality of each discussion topic, and the time reasonably necessary for the directors to effectively educate themselves about that matter, discuss it, and take action.  The minutes should then reflect and record this flow of information, debate, consideration, and action by the directors.
  • Consider what documents or presentations will be provided to the directors for review and discussion and whether such materials should be provided to the directors in advance of the meeting.
  • Give thought to what materials–if any–will be appended to minutes in the official books and records of the company.

Drafting minutes that properly record the material events in the life of a board of directors is an art more than a science, but like the classical orders of ancient art and architecture, the gloss from judicial decisions of the courts can define characteristics of minutes that bring that art to life in ways that unmistakably portrays director behavior fully complying with fiduciary norms.

Delaware Governor Issues Emergency Order Regarding Corporate Annual Meetings

I recently discussed on this page how the 2020 corporate annual meeting season was facing its own challenges in the midst of the global pandemic and worldwide orders against the congregation of persons, and discussed the potential use of virtual annual meetings being conducted remotely by electronic communications as a means to overcome such challenges.  On the evening of April 6, 2020, the Governor of the State of Delaware issued his Tenth Modification to the Covid-19 State of Emergency, which contained provisions fostering a Delaware corporation’s ability to react where it had already called and noticed an annual meeting of stockholders to be held in-person.

The Tenth Modification of the Covid-19 State of Emergency permits Delaware corporations subject to the  reporting requirements of Section 13(a) and 15(d) of the Securities Exchange Act of 1934, and who have already given notice of an in-person annual meeting of stockholders, to either (a) convene the meeting as scheduled but via electronic “virtual” means or (b) adjourn the meeting to another date to be held remotely via electronic means by both (i) making a public filing with the SEC giving notice of such changes to the convening of the meeting, and (ii) publishing the notice on the company’s website.

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The opinions expressed on this blog are those of the author and are not to be construed as legal advice.

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