On February 12, 2019, Vice Chancellor Kathaleen S. McCormick of the Delaware Court of Chancery granted a motion to dismiss a stockholder derivative suit against the former CEO and directors of United Continental Holdings, Inc. asserting breaches of fiduciary duties, waste, and unjust enrichment. City of Tamarac Firefighters’ Pension Trust Fund v. Corvi, C.A. No. 2017-0341-AGB (Del. Ch. Feb. 12, 2019). A special committee of the board and a subcommittee it established, respectively, rejected a demand and a supplemental demand by plaintiff to claw back compensation in connection with separation agreements the former CEO and others that the committee had approved. The Court concluded that a stockholder that makes a pre-suit demand under Court of Chancery Rule 23.1 “concedes the independence of a majority of the board to respond,” but this does not preclude a court’s consideration of “obvious conflicts or bias when evaluating a board’s decision to delegate the demand-review process to a committee.” Nevertheless, the Court dismissed the complaint because it did not plead particularized facts to support conflicts at the committee level and, therefore, failed to demonstrate that the board was grossly negligent or acted in bad faith in responding to the demands.
Plaintiff argued that the Rule 23.1 demands were wrongfully refused because the members of the special committee and the subcommittee were conflicted by virtue of the special committee’s involvement in the approval of the separation agreements. Defendants argued that a stockholder that makes a pre-suit demand “tacitly concedes” the disinterest and independence of the board to respond and that this concession automatically extends to board committees.
The Court determined that plaintiff’s tacit concession “does not establish for all purposes the disinterest and independence of every member of the board.” Instead, according to the Court, the demand reflects a concession “only that the board as a whole would have been capable of considering a demand.”
Notwithstanding that conclusion, the Court found that plaintiff failed to demonstrate wrongful refusal of the demands and, therefore, dismissed the complaint. As to the alleged conflicts, the Court found that a person is not considered conflicted “when deciding whether to exercise a contractual right for which that person negotiated, at least not by reason of the fact that the person negotiated for the right.” Moreover, the Court noted that none of the members of the subcommittee that considered the supplemental demand were on the special committee at the time of, or otherwise involved in, the decisions to approve the separation agreements. Therefore, the Court held that the complaint did not plead facts sufficient to support an inference of gross negligence in connection with the consideration of the demand. The Court also rejected plaintiff’s argument that the terms of the separation agreements were so irrational as to support plaintiff’s contention that the board acted in bad faith in refusing the litigation demands.