Tossed Out With The Weeds – Delaware Chancery Court Dismisses Derivative Action Alleging Breaches of Fiduciary Duty by DuPont Directors and Officers
By Holly Vance and Jonathan Miner
In Ironworkers v. Andreotti, Vice Chancellor Glasscock of the Delaware Chancery Court granted DuPont’s motion to dismiss for plaintiff’s failure to properly state a derivative action claim. In reaching its decision, the Court affirmed that the business judgment rule is the standard of review used in derivative actions where the plaintiff has made a demand of the board of directors and the board declined such demand.
Beginning in 2002 DuPont began to develop genetically modified corn and soybean seeds to compete with Monsanto’s “Roundup Ready” seeds, which have the ability to survive application herbicides, including Monsanto’s own Roundup herbicide. DuPont referred to the product it was developing as “GAT”. During this same time period, DuPont was also licensing the Roundup Ready gene trait from Monsanto. DuPont encountered setbacks in field testing of GAT and as a result began experiments in combining GAT together with the Roundup Ready gene trait. The relationship between DuPont and Monsanto deteriorated as DuPont attempted to develop its GAT products, and in May 2009 Monsanto brought suit against DuPont for breaches of the license agreement for the Roundup Ready gene trait, patent infringement and other related claims. In July 2012 a jury found in favor of Monsanto and awarded it $1.2 billion in damages. DuPont began steps to appeal the decision and began negotiating a settlement with Monsanto. On March 25, 2013 DuPont and Monsanto entered into a settlement agreement that was structured as a new license agreement and included royalty payments to Monsanto of $1.75 billion over 10 years for the rights to use the patent for the Roundup Ready gene trait.
Around the time of the settlement, DuPont received several stockholder demands, including the demand from the plaintiff that the Board investigate and bring suit against certain of DuPont’s officers and directors in connection with the alleged breaches of fiduciary duties connected to the manner in which the Monsanto lawsuit was conducted, the failed attempt to develop GAT, and the decision to combine GAT together with the Roundup Ready gene trait.
A special committee authorized by DuPont’s board, and consisting of independent directors, was tasked with reviewing the stockholder demands. The special committee retained outside counsel, conducted an investigation, produced a detailed report and finally recommended to the board that a suit against the officers and directors was not in the best interests of DuPont. The board adopted the recommendations of the special committee, after which plaintiff filed its complaint on May 29, 2014, naming numerous DuPont’s officers and directors as defendants and DuPont as nominal defendant. The defendants filed a motion to dismiss for failure to state a claim for derivative action under Chancery Rule 23.1.
Derivative actions under Chancery Rule 23.1 have split into two branches, the first of which includes instances where a plaintiff brings a case without first making a demand to a company’s board of directors on the theory that the board is incapable of making an impartial decision. The second branch involves cases where the plaintiff first made a demand of the board, and upon rejection of such demand, instituted a derivative action. This case fell within this second category, and the Court noted that “[a] shareholder plaintiff, by making demand upon a board before filing suit, tacitly concedes the independence of a majority of the board to respond.” The decision to refuse a demand under such circumstances will be treated with deference by the court in the same way that any disinterested and independent decision is reviewed, i.e., it will be subject to the business judgment rule. Under the business judgment rule standard, in order to survive a motion to dismiss, the plaintiff must plead facts that create a reasonable doubt that 1) the board’s decision to deny the demand was consistent with its duty of care, or 2) that the board acted in good faith.
The Court granted DuPont’s motion to dismiss, finding that Plaintiff’s eight counts did nothing more than show disagreement with the conclusions of an independent and adequately represented board, which was insufficient for pleading a derivative action claim. The Court concluded that “[t]he question is not whether the conclusion was wrong; the question is whether the Board was grossly negligent in failing to inform itself, or intentionally acted in disregard of the Company’s best interests in deciding not to pursue the litigation the Plaintiff demanded.”