In Oklahoma Firefighters Pension & Retirement System, et al. v. Corbat, et al. (“Corbat I”), the Delaware Court of Chancery underscored the high burden to adequately allege a so-called Caremark claim, long familiar to practitioners as “possibly the most difficult theory in corporation law upon which a plaintiff might hope to win a judgment.” Corbat I echoes and builds upon long-standing Delaware law holding that Caremark claims are preconditioned on directorial bad faith and must rise to the level of showing scienter—or intent—of those directors to “knowingly act for reasons other than the best interests of a corporation.” The bar to plead such a claim is unmistakably high. While the Corbat I Court lauded Plaintiffs’ “admirable effort,” including records obtained from a prior books and records action under 8 Del. C. § 220 and a “ponderous omnibus of a complaint . . . . [that made] it reasonably conceivable that the directors, despite  red flags, failed to take actions that may have avoided loss to the company,” it ultimately found that Plaintiffs failed to clear the high bar of pleading the scienter necessary to sustain a Caremark claim.
Corbat I revolved around a series of alleged corporate “red flags” that purportedly warned the directors (“Directors”) of Citigroup, Inc. (“Citigroup”) of unlawful and inappropriate business and compliance activities reaching back a decade. Plaintiffs claimed under Caremark that the Directors  breached their duties of loyalty by failing to address these red flags and, relatedly, sought to excuse Delaware’s demand requirement for derivative actions on the basis that the Directors faced a substantial likelihood of their own liability. The Court found, however, that the Directors did not face a realistic threat of liability under any of Plaintiffs’ Caremark claims and thus dismissed Plaintiffs’ claims for failure to comply with the demand requirements for derivative actions.
A range of pleading infirmities prevented Plaintiffs’ allegations from clearing the high bar of Caremark. For instance, Plaintiffs at times failed to adequately allege the existence of certain red flags or that the Directors failed to respond to the red flags. Plaintiffs’ most pervasive problem, however, was a failure to adequately allege that the Directors exhibited the necessary scienter to act against the interests of their company. A number of Plaintiffs’ averments alleged that the Directors failed to optimally, or even effectively, adopt strategies to address and resolve the corporate red flags. “But the question is not whether Citigroup’s board adopted effective  controls”; rather, it is whether the Directors demonstrated an “intentional dereliction of duty, [or] a conscious disregard for one’s responsibilities.” In a Caremark claim, “a board’s efforts can be ineffective, its actions obtuse, its results harmful to the corporate weal, without implicating bad faith.”
The takeaway for practitioners is clear: “an ineffective response does not, without more, indicate bad faith.” And without allegations of bad faith, plaintiffs cannot plead a viable Caremark claim. This decision builds upon the Court’s existing principle that “a bad outcome, without more, does not equate to bad faith [in a Caremark claim],” even in the face of possibly negligent Director behavior. Indeed, the Court recognized that Plaintiffs’ “admirable” pleadings allowed it to infer “directorial negligence” in how the Directors responded to some of the red flags. Without sufficient allegations of bad faith, however, the Court could not and would not find that the Directors’ conduct passed the high bar of Caremark.
On January 4, 2018—mere weeks after the Court’s decision—the Office of the Comptroller of the Currency publicly announced that it had entered into a consent order with Citigroup related to violations of a prior consent order. The new consent order, dated December 27, 2017, slapped Citigroup with a $70 million penalty and required improved internal compliance controls. On January 17, 2018, Plaintiffs filed a motion to reopen the Court’s judgment and permit an amended complaint incorporating the new facts—their motion cast these and other facts as “a knowing failure to act in good faith.” On March 12, 2018, however, the Court declined to reopen its judgment because Plaintiffs “failed to meet their ‘heavy burden’ of showing that the existence of the latest consent order would probably alter my conclusion that demand is not futile as to the [relevant] allegations.” While the Court assumed without deciding that the newest consent order was newly discovered evidence, it found that Plaintiffs still had not cured the underlying problem with their complaint: “[b]ad results alone do not imply bad faith,” and the new consent order, while “reveal[ing] that Citibank was not in compliance for a longer period of time than the operative pleading suggested,” still did not bridge the gap to a “reasonable inference of intentional dereliction of duties” for at least half of the Directors, as required under the demand futility test for derivative actions. Accordingly, Plaintiffs’ new evidence did not disturb—and instead only deepened—the holdings and practitioner takeaways from Corbat I.