This post was prepared by Frank Reynolds, who has been following Delaware law and writing about it in various publications for over 30 years.
The Chancery Court recently dismissed shareholder charges that AmerisourceBergen Corp. officers and directors breached their Caremark duties, finding insufficient proof that they caused the pharma company to prioritize opioid pill profits over regulatory compliance and ignore investigation, subpoena, and lawsuit red-flags in Lebanon County Employees’ Retirement Fund, et al. v. Collis, et al., C.A. No. 2021-1118-JTL (opinion issued Del. Ch. Dec. 22, 2022).
Vice Chancellor Travis Laster’s December 22 opinion found plaintiff investors, led by two pension funds, failed to show that AmerisourceBergen’s directors faced such liability for allegedly helping trigger America’s massive opioid addiction crisis that they couldn’t objectively decide whether a derivative suit over the company’s losses should continue. Therefore, the derivative action failed the pre-suit demand test, he ruled as to the second half of a two-part defense bid to oust Caremark charges that the directors disloyally ignored the company’s regulatory obligations and pushed a business plan to maximize profits by illegally mismarketing the pain drug. In re Caremark Int’l Inc. Deriv. Litig, 698 A.2d 959, 970 (Del. Ch. 1996).
One week earlier, on December 15, Vice Chancellor Laster’s 94-page opinion had ruled that under a “separate accrual” method of determining when the pharma company’s directors should have been put on notice of their potential liability for allegedly mismarketing a dangerously addictive drug, the various charges were timely filed. But that novel ruling – which addressed the first part of the defendant directors’ two-prong dismissal move — only kept the derivative suit alive for an additional week.
Cues from federal trial
The Court’s Dec. 22 decision turned on the findings of a federal court in West Virginia, in a related bellwether test case to decide nationwide liability for damages to opioid users. That court had ruled earlier last year that the directors could not be held legally liable for making decisions that directly damaged the company and its investors. The vice chancellor said that federal judge had the advantage of having considered all the evidence and testimony in the opioid damages trial and had found insufficient reason to hold the directors individually liable for causing those damages. City of Huntington v. AmerisourceBergen Drug Corp. (West Virginia Decision), — F. Supp. 3d —, 2022 WL 2399876 (S.D.W. Va. July 4, 2022).
Therefore, the vice chancellor ruled in the December 22 opinion, it was unlikely that the directors’ decision on the merits of the derivative suit would be swayed by the possibility that they might face liability and a conflict of interest that would disqualify them under the pre-suit demand rule for lack of objectivity.
AmerisourceBergen, one of three major wholesale distributors of opioid pain medication in the United States over the past two decades, found itself at the center of America’s opioid epidemic and in 2021, agreed to pay over $6 billion as part of a nationwide settlement to resolve multidistrict litigation brought against the three and has incurred hundreds of millions of dollars settling other lawsuits and over $1 billion in defense costs.
According to the court’s record, two pension funds sued, contending that Amerisource’s directors and officers breached their fiduciary duties by making affirmative decisions and conscious non-decisions that led “ineluctably” to the harm that the Company has suffered. Plaintiffs sought to shift the responsibility for that harm from AmerisourceBergen to the human fiduciaries that allegedly caused it to occur. The suit included;
“Red flag” claims that officers failed to address congressional investigations, subpoenas from prosecutors, lawsuits by state attorneys general, and an eventual torrent of civil lawsuits over alleged drug diversion.
“Massey” claims that that the Company’s officers and directors took a series of acts which, when viewed together, support a pleading-stage inference that they knowingly pursued a business plan that prioritized profits over compliance. In re Massey Energy Co., 2011 WL 2176479, *20 (Del. Ch. May 31, 2011).
Suspicion vs. outcome
Vice Chancellor Laster acknowledged that as to the demand issue, “standing alone, the avalanche of investigations and lawsuits without any apparent response until the 2021 Settlement would support a well-pled Red-Flags Claim. Likewise, the series of decisions that culminated in the Revised Order Monitoring Program, along with the decision to keep that framework in place until the 2021 Settlement, would support a well-pled Massey Claim.” He said the directors and officers appeared to not only know of the red flags – they were “wrapped in them.”
But the result of the bellwether trial effectively gave the West Virginia federal judge — and then the vice chancellor — a view of the future as to how those suspicions would play out when all the evidence and testimony to support those claims was in. Based on these findings, the West Virginia Court had ruled that “[n]o culpable acts by defendants caused an oversupply of opioids,” and it found “no admissible evidence in this case that defendants caused diversion that resulted in an opioid epidemic.”
Those findings were key in deciding the demand issue, the vice chancellor noted, because, “When conducting a demand futility analysis, Delaware courts ask, on a director-by-director basis:
- whether the director received a material personal benefit from the alleged misconduct that is the subject of the litigation demand;
- whether the director faces a substantial likelihood of liability on any of the claims that would be the subject of the litigation demand; and
- whether the director lacks independence from someone who received a material personal benefit from the alleged misconduct that would be the subject of the litigation demand or who would face a substantial likelihood of liability on any of the claims that are the subject of the litigation demand.”
“The findings in the West Virginia Decision are not preclusive, but they are persuasive,” Vice Chancellor Laster concluded. “The West Virginia Court found that AmerisourceBergen did not fail to comply with its anti-diversion obligations. That finding knocks the stuffing out of the plaintiffs’ claim.”
“As with the Red-Flags Claim, the West Virginia Decision is the plaintiffs’ undoing. A Massey Claim depends on a business plan that violates the law. The West Virginia Court held that the Company’s business plan did not violate the law,” he ruled.