Genworth Financial, Inc. Consolidated Derivative Litigation, C.A. No. 11901-VCS (Del. Ch. Sept. 29, 2021) (Slights, V.C.)
In this memorandum opinion, the Court of Chancery granted a motion to dismiss breach of fiduciary duty claims against the directors of Genworth Financial Inc. (“Genworth” or the “Company”) for failing to plead demand futility after holding that the complaint was properly viewed as alleging bad faith intentional breaches of fiduciary duty rather than failure of oversight claims under Caremark.
This litigation arose out of Genworth’s allegedly false and misleading statements at stockholder meetings and in public filings about the performance of the Company’s long-term care insurance business and in connection with an IPO of the Company’s Australian mortgage insurance business. Plaintiffs alleged that the Company’s board of directors (the “Board”) was aware of and endorsed the purportedly false and misleading disclosures.
Plaintiffs argued that demand was futile because a majority of the Board in place at the time the complaint was filed faced a substantial likelihood of liability. The Court applied the three-part demand futility standard from Zuckerberg. To determine if the majority of the Board faced a substantial likelihood of personal liability under Zuckerberg’s second prong, the Court had to first classify the allegations as Caremark claims or bad faith acts in violation of the duty of loyalty, a point of disagreement between the parties.
Plaintiffs argued their claims fell under the second prong of Caremark, which requires a plaintiff to plead particularized facts that directors knew of a red flag that warned of corporate malfeasance and consciously acted to disregard their duty to address the warning. Plaintiffs claimed that the Board had direct knowledge of the alleged wrongdoing at the time of the misleading disclosures and participated in the wrongdoing by allowing the disclosures to stand uncorrected. While describing plaintiffs’ claims as “Caremark-like,” the Court held that such claims did not fall under Caremark’s second prong because they did not involve the critical scienter element of consciously disregarding a red flag. Rather, plaintiffs alleged that the Board engaged in bad faith breaches of the fiduciary duty of loyalty by causing the Company to issue misleading disclosures.
Having classified the claims as such, the Court analyzed whether plaintiffs adequately pled that a majority of the Board faced a substantial likelihood of liability. Finding that documents incorporated into the complaint showed the Board reasonably relied on the Company’s auditors and other advisors for the veracity of the disclosures at issue and the complaint did not support a reasonable inference that the Board should have questioned such reliance, the Court held that plaintiffs did not adequately allege that the directors intentionally authorized false or misleading disclosures and therefore did not face a substantial likelihood of liability. Demand was thus not excused, necessitating dismissal under Rule 23.1.
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