In City of Detroit Police & Fire Ret. Sys. on Behalf of NiSource, Inc. v. Hamrock, No. CV 2021-0370-KSJM, the Delaware Court of Chancery granted a motion to dismiss duty of oversight claims against an energy company’s directors following a pipeline explosion. Acknowledging that recent caselaw has underlined that, for “mission critical” operations, a “board’s oversight function must be rigorously exercised,” the court nonetheless found that the defendants did not face a substantial likelihood of oversight-related liability sufficient to support a finding of demand futility because: (1) the record showed an active committee overseeing pipeline safety; and (2) that, even though certain red flags were present, none of them would have put a reasonable board member on notice of the risk of a pipeline explosion.

NiSource, Inc. is an energy holding company with natural gas and electricity businesses. One of NiSource’s former subsidiaries attempted to repair a natural gas line, which led to natural gas explosions (the Greater Lawrence Explosions) that caused significant damage, numerous injuries, and one fatality. Following the Greater Lawrence Explosions, NiSource settled an investigation by the Massachusetts Attorney general for US$56 million, pleaded guilty to criminal violations of portions of the Natural Gas Pipeline Safety Act and paid restitution and a US$53 million fine, and entered into a deferred prosecution agreement that appointed an independent monitor and required the implementation of certain safety procedures.

Following these events, the plaintiff filed a derivative suit against the board of directors of NiSource (the Board), alleging a duty of oversight claim under both prongs of Caremark. The defendants moved to dismiss, arguing that the plaintiff failed to plead demand futility. The plaintiff argued that a majority of NiSource’s Board faced a substantial likelihood of liability under the second prong of the Zuckerberg demand futility test. The Delaware Court of Chancery disagreed with the plaintiff, finding that the Board did not face a substantial likelihood of liability for the plaintiff’s alleged Caremark claim and granting the defendants’ motion to dismiss.

The court took each prong of Caremark in turn. First, the court found that the plaintiff failed to plead that the Board completely failed to implement a system to monitor the “mission critical” risk of pipeline safety. The plaintiff’s complaint actually demonstrated that the Board and one of its committees, the ES&S Committee, did in fact monitor and report on pipeline safety. The court pointed to at least 14 instances to support the Board’s and ES&S Committee’s oversight of the issue, all from documents the plaintiff obtained pursuant to a Section 220 demand and included in its complaint. As a result, there was not an “utter failure” to monitor pipeline safety.

Second, the court found that the Board and the ES&S Committee did not violate the law for profit or ignore red flags that led to the Greater Lawrence Explosions. The former theory, which was based on the 2011 In re Massey Energy Co. case, alleged that NiSource’s business model profited from violating laws meant to regulate natural gas pipelines. The court found that the facts in Hamrock simply did not rise to the level of the scheme in Massey, noting that the Board had “multiple committees dedicated to compliance risk” and had, at various times, taken steps to implement various safety precautions.

With respect to red flags, the court found that, although the plaintiff adequately pleaded that the Board was aware of certain alleged red flags, those red flags were too attenuated from the Greater Lawrence Explosions to be proximate cause, meaning they would not have given a reasonable observer notice of the risk of the Greater Lawrence Explosions. In particular, the court found that the Board knew that poor recordkeeping presented a significant risk generally, but did not know of specific facts that indicated the potential for the Greater Lawrence Explosions.

Based on this analysis, the court concluded that the Board did not face substantial liability for the plaintiff’s Caremark claims, and thus that demand was not futile. The court therefore dismissed the complaint.