Delaware Court of Chancery confirms Caremark claims is still difficult theory for plaintiffs

2 March 2021 Reed Smith Client Alerts

Home Perspectives Delaware Court of Chancery confirms Caremark claims is still difficult theory for plaintiffs

In Richardson v. Clark,¹ the Delaware Court of Chancery granted a motion to dismiss the plaintiffs’ Caremark claim (that is, a failure to oversee the actions of a company) because the complaint failed to provide particularized allegations of bad-faith action (or inaction) by a board. This opinion is significant because it demonstrates that “feckless oversight and lack of vigor” differ from bad-faith oversight for the purpose of Caremark claims.

Authors: Brian M. Rostocki Justin M. Forcier

Background

Nominal defendant MoneyGram International, Inc. (MoneyGram or the Company) specializes in the transfer of funds among businesses and individuals worldwide. While the majority of money transfers are for legitimate purposes, some bad actors use MoneyGram’s platform and services for fraudulent and money-laundering activities. Because of the risk of misuse by some, MoneyGram is highly regulated by the U.S. government. That regulation includes the requirement that MoneyGram maintain certain internal controls and compliance systems to guard against those bad actors. Failure to comply with the applicable laws and regulations could result in the suspension or termination of MoneyGram’s business.

In 2012, federal prosecutors alleged that MoneyGram failed to comply with anti-money-laundering requirements. The Company avoided prosecution by entering into a deferred prosecution agreement (the DPA) under which MoneyGram agreed to (i) pay $120 million into a fund for victims of fraud enabled by the Company’s services and (ii) substantially improve the Company’s compliance systems and controls over five years. Later, MoneyGram was compelled to pay an additional $125 million into the victims’ restitution fund and to extend the DPA by four years.

In their complaint, the plaintiffs alleged that the DPA was ineffective and complaints of fraudulent activities had failed to decrease, violating the terms of the DPA. The plaintiffs brought claims against MoneyGram’s directors and two of its officers for their alleged failure “to exercise oversight sufficient to comply with their fiduciary duties.” The plaintiffs alleged that the required compliance systems and controls had been implemented, but the defendants had “consciously failed to monitor or oversee operations thus disabling themselves from being informed of risks or problems requiring their attention.”

Analysis

Prior to filing this action, the plaintiffs did not make a pre-suit demand on the board to take action because the plaintiffs alleged that such a demand would be futile since the director-defendants, as parties to the case, were interested in the outcome. The Court of Chancery began its analysis by reaffirming that a demand is not excused simply because directors are named as defendants in a lawsuit. Instead, a plaintiff must plead facts implying a substantial likelihood of directorial liability to satisfy Rule 23.1.

In addition, the court observed that MoneyGram’s certificate of incorporation includes an exculpation clause under 8 Del. C. section 102(b)(7), which exculpates directors from liability for breaches of the duty of care. Therefore, to survive a motion to dismiss, plaintiffs would have to plead with particularity that defendants had knowingly acted in bad faith.

In addressing what the plaintiffs claimed to be “red flags” in MoneyGram’s compliance attempts, the court acknowledged that the Company had taken steps to comply with the DPA, but it had not gone far enough in its attempts. Specifically, the court stated:

The DPA left it up to the Company to devise methods to prevent agent fraud; on the Defendant Directors’ watch the company implemented such actions, but with insufficient speed and skill. But this allegation simply tells me the Board did a poor job applying its discretion to act; to my mind, this does not reasonably imply bad faith.

Going further, the court held that the facts of this case only “suggest a failed effort, not one opposed to the interests of MoneyGram or otherwise in bad faith.” Although the court did say that it “is conceivable that a purported attempt at remediation could constitute bad faith; for instance, a mere sham remediation or an insincere action to fool regulators may be actionable.” However, “[i]f a failed directorial attempt to remediate a problem is, because of its failure, actionable, a perverse incentive will be created.”

Key takeaways

Caremark claims in Delaware (that is, claims that corporate fiduciaries engaged in bad-faith corporate oversight) continue to be one of the most difficult theories in Delaware corporate law under which a plaintiff can prevail. And the reasoning in this opinion indicates that failed attempts to go along with compliance obligations are not sufficient evidence of director liability. Instead, to possibly be actionable, those efforts would likely need to be part of an overall sham to fool government regulators about the corporation’s compliance.

2020 WL 7861335 (Del. Ch. Dec. 31, 2020).

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