'Blue Bell' Reaffirms but Does Not Expand the Boundaries of Oversight Liability
Plaintiffs and defendants alike may have thought they felt tremors ripple through the legal system last month when, for the first time, the Delaware Supreme Court reversed dismissal of derivative claims based on an alleged failure to monitor in Marchand v. Barnhill.
July 17, 2019 at 09:07 AM
9 minute read
Plaintiffs and defendants alike may have thought they felt tremors ripple through the legal system last month when, for the first time, the Delaware Supreme Court reversed dismissal of derivative claims based on an alleged failure to monitor in Marchand v. Barnhill, Case No. 533, 2018, 2019 Del. LEXIS 310 (June 18, 2019), or “Blue Bell.” Prior to the Blue Bell decision, the court has repeatedly recognized that claims asserting that directors are liable for allegedly failing to monitor or oversee a corporation—often referred to as Caremark claims—rest upon what is “possibly the most difficult theory in corporation law upon which a plaintiff might hope to win a judgment,” as in Stone v. Ritter, 911 A.2d 362, 372 (Del. 2006) (quoting In re Caremark International Derivative Litigation, 698 A.2d 959, 967 (Del. Ch. 1996)). Now, in a unanimous decision authored by Chief Justice Leo E. Strine Jr. just days before he announced his retirement, the court has confirmed that such claims are viable when a board fails to implement any system to monitor a company's central compliance risks, see Blue Bell, 2019 Del. LEXIS 310, at *36-37. It can be expected that plaintiffs will prominently feature Blue Bell in virtually all briefs opposing dismissal of Caremark claims for years to come. A careful review of the Blue Bell decision, however, reveals that it contains nothing seismic.
Properly understood, Blue Bell does not lower the high bar for pleading oversight liability. In reversing dismissal, the court held, first, that the plaintiff had pleaded demand futility by alleging that a majority of the company's directors lacked independence, and, second, that the plaintiff had stated a claim for oversight liability under Caremark. It has been settled Delaware law for decades that “the necessary conditions predicate for oversight liability are the directors utterly failed to implement any reporting or information system or controls; or having implemented such a system or controls, consciously failed to monitor or oversee its operations thus disabling themselves from being informed of the risks or problems requiring their attention,” see Stone, 911 A.2d at 370 (applying Caremark). Blue Bell is a straightforward application of the first prong of this test. Its holding will have little impact on most motions to dismiss Caremark claims for at least two reasons.
First, the court's reasoning must be confined to the extraordinary facts of the Blue Bell case, where the board's inattention to “central compliance risks” jeopardized the viability of the company and the lives of its customers. The court emphasized that Blue Bell is a “monoline company that makes a single product—ice cream.” The company's management became aware that a potentially fatal bacteria, listeria, was present in the company's ice cream production facilities. Federal and state regulators had cited multiple food safety issues at the company's facilities, and both internal reports and a report from a private third party observed that listeria was present at its facilities. In fact, Blue Bell received 10 positive tests for listeria in a single year. Nonetheless, management's reports to the board in that time period allegedly relayed positive information about sanitation and made no reference to listeria, and the board implemented no reporting controls in an effort to ensure that it would become informed of this and similar risks.
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