In re LendingClub Corp. Derivative Litigation, Consolidated C.A. No. 12984-VCM (Del. Ch. Oct. 31, 2019) (McCormick, V.C.)
In this memorandum opinion, the Delaware Court of Chancery granted a motion to dismiss a Caremark claim for failure to make a demand or to adequately plead demand futility under Court of Chancery Rule 23.1. In particular, the Court found that plaintiffs failed to plead any facts that would support a determination that the director defendants acted in bad faith, and, as a result, a majority of the members of the board as of the time the complaint was filed did not face a substantial likelihood of liability regarding plaintiffs’ claims. Importantly, the Court distinguished the Delaware Supreme Court’s recent decision in Marchand v. Barnhill, which reversed a Court of Chancery decision dismissing a Caremark claim.
This action arises out of alleged oversight failures by the board of directors of LendingClub Corporation (“LendingClub”), an online platform facilitating loans. In response to a whistleblower complaint, LendingClub conducted an internal investigation that revealed potential issues relating to the sale of loans, related party transactions, and accounting practices. LendingClub self-reported the potential misconduct to the SEC, which led to an SEC investigation. Following the investigation, the SEC praised the board for its self-reporting, cooperation, and remediation efforts.
After the board publicly disclosed the results of the investigation, plaintiffs commenced an action alleging violations of the board’s oversight duties under Caremark, asserting that the board failed to: (i) implement appropriate internal controls regarding LendingClub’s operations and compliance, and (ii) monitor LendingClub’s operations and regulatory compliance.
Applying the Rales standard of demand futility, the Court examined whether the board could have impartially considered the merits of a demand at the time the complaint was filed. Plaintiffs argued that the board could not have impartially considered the merits of the demand because a majority of the members of the board faced a substantial likelihood of liability from the Caremark claims. With respect to plaintiffs’ claim under the first category of Caremark, the Court found that plaintiffs failed to plead facts concerning LendingClub’s alleged failure to implement internal controls that would support a finding that the board utterly failed to implement such controls, and noted that, in fact, LendingClub had an audit committee that met monthly. Likewise, with respect to plaintiffs’ claims under the second category of Caremark, the Court found that plaintiffs failed to demonstrate that the board consciously failed to monitor LendingClub’s operations or otherwise acted in bad faith.
Importantly, in connection with its analysis of plaintiffs’ claim under the first category of Caremark, the Court addressed the Supreme Court’s recent decision in Marchand. While Marchand was decided after briefing on the motion to dismiss and was not addressed at oral argument, the Court noted that Marchand was “readily distinguishable.” The Court emphasized that, unlike in Marchand where there was no system of board-level monitoring, LendingClub had an audit committee, a risk committee, and an independent auditor. The Court did not discuss Marchand in connection with plaintiffs’ claim under the second category of Caremark.
Accordingly, the Court found that demand was not excused because plaintiffs failed to allege that a majority of the members of the board as of the time the complaint was filed were unable to impartially consider a pre-suit demand. As a result, the Court granted the defendants’ motion to dismiss.