In re General Motors Company Derivative Litig., C.A. No. 9627-VCG (Del. Ch. June 26, 2015) (Glasscock, VC)
In this memorandum opinion, the Court of Chancery dismissed a derivative complaint under Rule 23.1, finding that plaintiffs failed to show that the board of directors (the “Board”) of General Motors Company (“GM”) acted in bad faith or otherwise faced a substantial likelihood of personal liability arising from GM’s faulty ignition switches.
In 2014, GM recalled approximately 13 million of its vehicles due to faulty ignition switches, which caused injuries and deaths to GM customers. It also led to, among other things, monetary losses, lawsuits, and fines against GM, including a $1.5 billion charge against earnings in the first half of 2014 and a $35 million government fine. Based on these losses, the plaintiffs filed a derivative suit alleging that the Board breached its duty of loyalty by failing to oversee GM’s operations. The defendants moved to dismiss under Rule 23.1 for failure to plead with particularity that demand on GM’s board would have been futile.
Plaintiffs argued demand would have been futile because the Board acted in bad faith—i.e., in knowing violation of its fiduciary duties or with conscious disregard of a known duty to act—by failing to implement a reporting system that would have informed them of risks associated with safety defects as well as potential punitive damages from lawsuits. Plaintiffs argued that the Board acted in bad faith by transferring GM’s risk management functions from GM’s Finance and Risk Committee to GM’s Audit Committee, at a time when GM’s risk management system was already functioning poorly. Plaintiffs alleged that the transfer of the risk management functions was incomplete because the Audit Committee Charter did not fully adopt the Finance and Risk Committee’s responsibilities.
The Court rejected these arguments, finding plaintiffs failed to advance any “sufficiently pled allegation that the Board was aware that its risk management system was not functioning as it should.” Thus, there were no “red flags” or other bases from which the Court could infer knowledge on the part of the Board that GM’s reporting system was inadequate. Therefore, any decision on the part of the Board to make changes to the reporting system could not be said to be in bad faith.
Plaintiffs also argued that demand would be futile because the directors faced a substantial likelihood of personal liability for the conduct alleged in the complaint. According to plaintiffs, the Board faced a “substantial likelihood of personal liability” because they failed to exercise their duty of oversight in bad faith under the Court’s decision in In re Caremark International Inc. Derivative Litigation, 698 A.2d 959 (Del. Ch. 1996). Specifically, Plaintiffs alleged that the Board utterly failed to implement any reporting or information system or controls, which resulted in the Board being unaware of the defects that caused serious injuries or fatalities.
The Court found that plaintiffs failed to establish that the Board faced liability under a Caremark theory. The plaintiffs conceded that GM had a system for reporting risk to the Board. And the plaintiffs did not allege that the defendants had knowledge that this system was inadequate. Thus, the Court could not conclude that the Board was consciously acting in a manner inimical to GM and was advancing instead some other interest, or was otherwise violating its duty of loyalty by acting in bad faith. The Court therefore dismissed Plaintiff’s derivative claims pursuant to Rule 23.1.
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