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Inter-Marketing Group USA, Inc. v. Armstrong et. al., C.A. No. 2017-0030-TMR (Jan. 31, 2019) (Montgomery-Reeves, V.C.)

January 31, 2019

In this memorandum opinion, the Delaware Court of Chancery granted a motion to dismiss for failure to make a demand or to show that demand was excused as futile under Chancery Rule 23.1.

The nominal defendant, Plains All American Pipeline, L.P. (the “Company”), is a Delaware master limited partnership that owns thousands of pipelines in North America, one of which leaked, resulting in a costly oil spill on the California coast. Plaintiff, a unitholder in the nominal defendant, without making a pre-suit demand, brought a derivative suit under various causes of action, including breaches of fiduciary duty, against several entities and individuals who are purported to have failed to properly manage the nominal defendant.

The Court, as per the agreement of the parties, and relying on corporate law principles, analyzed demand futility under the Rales test which applies where a challenged action is not taken by the board that would consider the demand. Under Rales, the Court must determine whether there are particularized factual allegations as of the time the complaint is filed which create a reasonable doubt that the board of directors could have properly exercised its independent and disinterested business judgment in responding to the demand.

First, the Court rejected the Plaintiff’s argument that the directors were interested because their actions created a substantial likelihood of personal liability. The partnership agreement stated that “[a]ny standard of care and duty . . . shall be modified, waived or limited, to the extent permitted by law . . . so long as such action is reasonably believed . . . to be in, or not inconsistent with the best interests of the Partnership.” The Court held that this language eliminated common law fiduciary duties under the controlling precedent of Norton v. K-Sea Transportation Partners L.P. Therefore, the Court held that the directors could not face a substantial likelihood of personal liability for breaching duties that they did not owe.

The Court also rejected the Plaintiff’s argument that the majority of directors lacked independence. The Plaintiff only contested the independence of seven of the ten directors and, of those seven, alleged that three lacked independence because they were on the Audit Committee. The Court held that under settled Delaware law, membership on a committee responsible for decisions subject to challenge does not in itself call into question a director’s impartiality. The Court also rejected an argument that these same directors lacked independence because their “cognitive bias” suggested they would continue to act in a manner consistent with their past course of action. The Court noted that the directors had not approved a series of similar actions which they knew might not be in the best interest of the corporation, and held that mere approval of a transaction, in itself, is not enough to excuse demand. Therefore, since six of the ten directors had not been shown to lack independence, demand was not excused.

Finally, while the Court dismissed the complaint under Chancery Rule 23.1, it granted leave to amend on the basis of several felony and misdemeanor criminal convictions related to the spill in California which postdated the filing of the complaint and which could allow the Plaintiff to show a “tighter nexus” between the directors and the actions subject to the complaint.

The full opinion is available here