Wednesday, September 26, 2012
In an opinion in South v Baker, Vice Chancellor Laster ruminates on the number three:
[P]laintiffs‘ counsel was forced to retreat during oral argument to a more reductionist position: knowledge can be inferred because three safety incidents occurred within one year. ... And concededly the number three has a lot going for it. Three Graces. Three Fates. Three wishes from the djinni in Aladdin‘s lamp. It‘s the number of licks it takes to get to the center of a Tootsie Pop, and for fans of Schoolhouse Rock, it will always be a magic number. But three mining accidents in a year does not support a reasonable inference of board involvement, much less bad faith, conscious wrongdoing, or knowing indifference on the part of a board of directors, particularly where the incidents appear unrelated.
Visions of that wise owl chomping on that poor kid's lollipop appear. And ... is that how you spell genie of the lamp? I'll have to check that... In fairness, the issue for the court was a real one: to what extent can one impute knowledge or involvement to the board following the happening of corporate events, like mining accidents, when making a Caremark claim. Vice Chancellor Laster believes you can't. Better to file a Section 220 action first, do the investigation of the corporate books and records to find out what the board actually knew and then file a derivative claim. Absent the investigation it may be impossible to state the "particularized facts supporting a reasonable inference that a majority of the Board faces a substantial risk of liability". Without which, demand won't be excused.
So, again, the court returns to its mantra of using all the tools at hand before filing a derivative suit. This is now a familiar refrain and it's one way the court attempts to reduce the flow of placeholder litigation that in recent years has been flooding the court.
Although Laster dismisses the case with prejudice as to the named plaintiff, the board is not off the hook. Laster makes it clear that his dismissal is not an adjudication on the merits of any potential claims against the board, it's just a determination the instant plaintiff brought the case prematurely. Laster makes it clear that a subsequent, more diligent, plaintiff could file a 220 action and then bring a Caremark claim based on the same set of facts.