Giuliano v. Grenfell-Gardner et al., C.A. No. 2021-0452-KSJM (Del. Ch. Sept. 2, 2025) (McCormick, C.)

Background

In this memorandum opinion, Chancellor McCormick addressed a motion to dismiss brought by the defendants who are former directors and officers of Teligent, Inc. (“Teligent”).  In short, the court mostly denied the motion to dismiss and allowed Caremark claims brought by a bankruptcy plan administrator to proceed.

Teligent is a pharmaceutical company that received numerous FDA warning letters concerning regulatory failures in its manufacturing facilities between 2016 and 2021.  The last of those letters gave rise to a derivative lawsuit alleging breaches of fiduciary duty concerning misleading public statements and disclosure failures concerning the letters from the FDA.  Only six weeks after receiving the letter, Teligent filed for Chapter 11 bankruptcy protection in the Delaware bankruptcy court.  The Delaware bankruptcy court appointed a plan administrator to oversee the bankruptcy process, and that plan administrator became the sole director of Teligent’s successor entity. 

The plan administrator chose to take over the derivative litigation and brought direct claims against six former fiduciaries for oversight failures under the Caremark doctrine.  The plaintiff alleged that the company’s failure to oversee regulatory requirements culminated in bankruptcy.

The Court explained that this unusual procedural posture gave the plaintiff key information and procedural advantages.  Specifically, the plaintiff had full access to internal records, including emails, and the defendants could not raise the demand requirement of Court of Chancery Rule 23.1 as a defense.

The plaintiff alleged that the defendants failed to implement any board-level system for monitoring FDA compliance, even after learning of potential FDA violations, despite the fact that such compliance was “mission critical” to Teligent’s business.  The Board allegedly took no meaningful steps to address the issues raised by the FDA in its letters, and the violations worsened over time, ultimately bankrupting the company.

Analysis

Count I – Information-Systems Claim (Caremark Prong One)

In Count I, the plaintiff alleged that the director defendants failed to implement a reporting system that would keep the Board informed of the company’s regulatory compliance.

In its reasoning, the Court drew on Marchand v. Barnhill, 212 A.3d 805 (Del. 2019), emphasizing that boards must make a “good faith effort—i.e., try—to put in place a reasonable board-level system of monitoring and reporting.”  The Court concluded the plaintiff had adequately alleged that Teligent’s Board failed to meet even this baseline requirement by lacking “a board committee responsible for overseeing any central compliance risk” or even “training protocols designed to inform employees of central compliance risks.”

The Court rejected the defendants’ argument that sporadic communications from management sufficed to establish adequate reporting, noting that “a board’s reporting practice that allows management to elect to report (or not) on central compliance risks fails Caremark’s baseline requirement.”

The Court therefore denied the motion to dismiss Count I, ruling it was reasonably conceivable that the director defendants “utterly failed to implement any reporting or information system or controls” regarding FDA compliance, which was a “mission critical” task.

Count II – Red-Flags Claim (Caremark Prong Two)

In Count II, the plaintiff alleged that the director defendants were aware of but consciously disregarded the FDA letters.

The Court dismissed Count II, holding that the plaintiff failed to adequately allege that the directors consciously ignored red flags.  The Court concluded that:  “The Amended Complaint creates the impression that the Board was uninformed of the significance of the FDA compliance issues, not that they consciously disregarded red flags waved in their face.”  However, while the FDA letters were elevated to the Board, the significance was often downplayed.  For example, the Company’s CEO stated in a Board meeting that he “believed there would not be an adverse impact on future approvals out of the facility,” despite serious FDA findings.

The Court distinguished this case from others, including In re Clovis Oncology, Inc., 2019 WL 4850188 (Del. Ch. Oct. 1, 2019), where boards were demonstrably aware of and ignored external red flags.  The Court further explained the tension between an information-system theory and a red-flag theory, where, as here, the strength of the allegations concerning a lack of a reporting system can make it difficult to infer that a board received red flags of non-compliance.

Count III – Officer Oversight Liability / Breach of Duty of Loyalty Claim

In Count III, the plaintiff asserted both types of Caremark claims against the officer defendants, alleging that they breached their duty of loyalty by failing to “attempt to implement a reporting system and by consciously ignoring red flags regarding Teligent’s FDA compliance[.]”

The Court denied the motion to dismiss Count III against the CEO and CSO, holding it was reasonably conceivable that they failed to report known FDA issues to the Board.  The court explained:  “Just as it is reasonably conceivable that the Board failed to receive notice of red flags, it is reasonably conceivable that [the CEO] and [the CSO] were aware of the red flags and failed to report them to the Board.”

However, Count III was dismissed as to the CFO.  This was because FDA compliance did not fall within the CFO’s core job responsibilities and the alleged misconduct—non-disclosure of costs for a remediation consultant—was not tied to the regulatory failures, nor would its disclosure have alerted the Board about the Company’s regulatory compliance issues.

Count IV – Breach of Duty of Care Claim

Count IV was dismissed in its entirety.  Although pled as a duty of care claim (requiring a showing of gross negligence), the allegations were essentially oversight violations, which require a showing of bad faith.  The Court reiterated the principle that “[o]fficers cannot face Caremark liability for gross negligence.”

Conclusion

This opinion reinforces the principle that boards must implement meaningful oversight systems for mission-critical risks and that officers share in those obligations within their spheres of responsibility.

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