In a split decision, the Delaware Supreme Court applied the nuanced standards for demand futility in the context of Caremark claims against Duke Energy Company. In City of Birmingham Retirement and Relief System v. Good, No. 16-2017 (Del. Supr., Dec. 15, 2017), a clear majority of the Delaware Supreme Court, sitting en banc, found that demand futility was not adequately demonstrated in the context of Caremark claims, in light of the majority of the directors being independent. That is, an insufficient showing of bad faith was pleaded. See footnotes 70 and 75.
Brief Background: The context of this decision was massive long-term environmental violations that resulted in multiple large fines. The important facts in this decision were chronicled in detail in the 39-page decision, including the dissent.
Key Principles: The High Court’s majority opinion should be read by anyone who wants to fully understand the demand futility analysis under Delaware law. A few of the key principles recited in the opinion include the following:
- The fact that the board was aware of the circumstances resulting in environmental violations and fines “does not mean it consciously disregarded them—the presentations [to the board] show that the board was regularly informed of Duke Energy’s remedial actions—and the letters state that no governmental organization or agency addressed the issues, which does not show that the board disregarded them. See footnote 70.
- The court also observed other cases that explain that Delaware courts routinely reject the conclusory allegations that because illegal behavior occurred, internal controls must have been deficient, and the board must have known so. Id.
- A key distinguishing aspect between the majority opinion and the dissent in this case was explained in footnote 75: “. . . the question on appeal is not whether Duke Energy violated environmental laws. It did. Rather, the question is what the directors—a majority of whom were independent—knew about the violations and whether they ignored them. As we have shown, based on the specific arguments raised on appeal, the plaintiffs have not demonstrated a pleading stage reasonable inference that those directors knew Duke Energy: [(a)] was violating the law and [(b)] knew from the information presented to the board, that the Company ignored the violations.”
Dissent: The spirited dissent explained in great detail the facts which the Chief Justice viewed as sufficiently supportive of a conclusion that the board had knowledge of long term environmental violations and that particularized allegations supported a non-exculpated Caremark claim. See, e.g., footnote 121.