In re The Chemours Derivative Litigation, C.A. No. 2020-0786-SG (Del. Ch. Nov. 1, 2021) (Glasscock, V.C.)
In this memorandum opinion, the Court of Chancery held that a derivative complaint failed to adequately plead that the director defendants faced a substantial likelihood of liability under Section 174 of the Delaware General Corporation Law (the “DGCL”) based on alleged violations of Sections 160 and 173 of the DGCL. Applying the three-part demand futility test articulated in United Food and Commercial Workers Union and Participating Food Indus. Emp’rs Tri-State Pension Fund v. Mark Zuckerberg et al., the Court dismissed the complaint under Rule 23.1 for failure to make a demand on the board.
In 2015, E.I. DuPont de Nemours and Company (“Dupont”) spun off its Performance Chemicals division to form The Chemours Company (“Chemours”). In connection with the spin-off, Chemours assumed various environmental liabilities related to chemicals manufactured by the Performance Chemicals division. At the time of the spin-off, DuPont faced nation-wide litigation relating to these chemicals. Because the litigation was largely unresolved, the size of the liabilities was uncertain.
Between 2015 and 2020, the board of directors of Chemours (the “Board”) authorized several stock repurchases and quarterly dividends. The Board’s authorizations were based on calculations of Chemours’s surplus funds using GAAP-based accounting reserves. Plaintiffs argued that, because the environmental liabilities were contingent, the Board failed to properly account for them and thereby violated Sections 160 and 173 of the DGCL, which limit a corporation’s ability to repurchase shares or issue dividends except when using the corporation’s surplus funds.
Applying prior precedent, and consistent with Section 174 of the DGCL, the Court stated it would defer to a board’s surplus calculation if the directors calculated the surplus “in good faith, on the basis of acceptable data, by methods that they reasonably believe reflect present values,” and the calculation “is not so far off the mark as to constitute actual or constructive fraud.” The Court ruled that plaintiffs did not adequately plead that the Board was required to depart from the GAAP calculations to determine the surplus in this instance. Additionally, the Court determined the complaint failed to adequately plead that a majority of the Board did not reasonably believe in good faith that their calculation of the reserve was accurate. Therefore, plaintiffs failed to allege particularized facts that would undermine the Board’s reliance on its surplus calculation in determining that the stock repurchases and dividend payments complied with the DGCL.
The Court also determined that the director defendants did not face a substantial likelihood of liability because, under Section 172 of the DGCL, directors are “fully protected” from liability, including violations of Section 174, if they rely in good faith on the records of the corporation, presentations from corporation management, and financial advisors.
The Court determined that demand was not excused as to plaintiffs’ claim that, even absent liability under Section 174, the directors nonetheless breached their fiduciary duties because they authorized the capital returns when they knew Chemours faced a serious risk of insolvency. In dismissing the claim, the Court concluded that Chemours’s certificate of incorporation exculpated directors for breaches of fiduciary duty except bad faith and plaintiffs, rather than allege that the directors’ consciously disregarded their duties, had alleged only that the directors’ conduct was not reasonable.
Lastly, the Court dismissed plaintiffs’ claims against the officer defendants, who were alleged to have sold stock while aware that Chemours was insolvent and also to have failed to inform the Board regarding the size of the inherited environmental liabilities. The Court held that, even to the extent that the claims against the officer defendants implicated the same set of facts as the claims against the director defendants, the Court’s determination that the director defendants do not face a substantial likelihood of liability meant that the director defendants could impartially consider a demand relating to the allegations against the officer defendants.