Bricklayers Pension Fund of W. Pa. v. Brinkley, C.A. No. 2022-1118-MTZ (Del. Ch. July 12, 2024)
In derivative cases where a stockholder-plaintiff has not made a pre-suit demand on the board of directors, demand futility may be established at the pleadings stage by showing, inter alia, that a majority of directors faced a substantial likelihood of liability for the claims, which would be the subject of the litigation demand. Where a stockholder-plaintiff fails to establish demand futility, the stockholder-plaintiff’s complaint is subject to dismissal.
The plaintiff here was a stockholder of a healthcare company that administers Medicaid plans. The plaintiff sued the company’s board of directors after the company entered into twelve settlement agreements with various states. The company agreed to pay $596 million for claims arising from certain officers’ decisions, motivated by specific personal performance-based compensation metrics, to misrepresent costs to Medicaid. During this period, the company also had been subject to increasing regulatory scrutiny from consumer watchdogs due to its pass-through pricing model. The board received regular updates concerning legal, regulatory, and compliance risks, which included some reports of inaccurate recordkeeping and reporting at the company. But the board was not aware of the officers’ misconduct until a state attorney general filed suit.
The plaintiff filed its complaint without making a demand on the board, arguing that a demand would be futile because a majority of directors faced a substantial likelihood of liability for the underlying claims. The director defendants moved to dismiss, arguing that the plaintiff had failed to adequately allege demand futility.
The Court of Chancery noted that the plaintiff only sued eight of the directors currently on the board and, thus, the plaintiff had conceded that at least the other five directors could impartially consider a demand. The Court then analyzed the allegations concerning the director-defendants and determined that the plaintiff had come up short. Specifically, the Court commented that three of the directors whose independence was challenged had joined the board after many of the events that led to the Medicaid settlements, and, taken together, the plaintiff's allegations did not demonstrate that the three directors would face a substantial likelihood of liability. As a result, the Court found that those three were capable of impartially considering a demand. Together with the five non-defendant directors, the Court held that a majority of the board would have been capable of impartially considering a demand. Accordingly, the Court granted the defendants' motion to dismiss.
