Marchand v. Barnhill ( 2019 )

IN THE SUPREME COURT OF THE STATE OF DELAWARE
JACK L. MARCHAND II, §
§ No. 533, 2018
Plaintiff Below, §
Appellant, § Court Below: Court of Chancery
§ of the State of Delaware
v. §
§ C.A. No. 2017-0586-JRS
JOHN W. BARNHILL, JR., GREG §
BRIDGES, RICHARD DICKSON, §
PAUL A. EHLERT, JIM E. KRUSE, §
PAUL W. KRUSE, W.J. RANKIN, §
HOWARD W. KRUSE, PATRICIA §
I. RYAN, DOROTHY MCLEOD §
MACINERNEY and BLUE BELL §
CREAMERIES USA, INC., §
§
Defendants Below, §
Appellee. §
Submitted: April 24, 2019
Decided: June 18, 2019
Corrected: June 19, 2019
Before STRINE, Chief Justice; VALIHURA, VAUGHN, SEITZ, and
TRAYNOR, Justices, constituting the Court en Banc.
Upon appeal from the Court of Chancery. REVERSED and REMANDED.
Robert J. Kriner, Jr., Esquire (Argued), and Vera G. Belger, Esquire, CHIMICLES
SCHWARTZ KRINER & DONALDSON-SMITH LLP, Wilmington, Delaware;
Michael Hawash, Esquire, and Jourdain Poupore, Esquire, HAWASH CICACK &
GASTON LLP, Houston, Texas, Attorneys for Appellant, Jack L. Marchand II.
Paul A. Fioravanti, Jr., Esquire (Argued), and John G. Day, Esquire, PRICKETT,
JONES & ELLIOT, P.A., Wilmington, Delaware, Attorneys for Appellees, John W.
Barnhill, Jr., Richard Dickson, Paul A. Ehlert, Jim E. Kruse, W.J. Rankin, Howard
W. Kruse, Patricia I. Ryan, Dorothy McLeod MacInerney, and nominal defendant
Blue Bell Creameries USA, Inc.
Srinivas M. Raju, Esquire, and Kelly L. Freund, Esquire, RICHARDS, LAYTON &
FINGER, P.A., Wilmington, Delaware, Attorneys for Appellees, Greg Bridges and
Paul W. Kruse.
STRINE, Chief Justice:
Blue Bell Creameries USA, Inc., one of the country’s largest ice cream
manufacturers, suffered a listeria outbreak in early 2015, causing the company to
recall all of its products, shut down production at all of its plants, and lay off over a
third of its workforce. Blue Bell’s failure to contain listeria’s spread in its
manufacturing plants caused listeria to be present in its products and had sad
consequences. Three people died as a result of the listeria outbreak. Less
consequentially, but nonetheless important for this litigation, stockholders also
suffered losses because, after the operational shutdown, Blue Bell suffered a
liquidity crisis that forced it to accept a dilutive private equity investment.
Based on these unfortunate events, a stockholder brought a derivative suit
against two key executives and against Blue Bell’s directors claiming breaches of
the defendants’ fiduciary duties. The complaint alleges that the executives—Paul
Kruse, the President and CEO, and Greg Bridges, the Vice President of Operations—
breached their duties of care and loyalty by knowingly disregarding contamination
risks and failing to oversee the safety of Blue Bell’s food-making operations, and
that the directors breached their duty of loyalty under Caremark.1
1
In re Caremark Int’l Inc. Derivative Litig., 698 A.2d 959 (Del. Ch.1996) (Allen, C.); see also
App. to Opening Br. at A67–68 (Verified Stockholder Derivative Action Complaint (Aug. 14,
2017)).
The defendants moved to dismiss the complaint for failure to plead demand
futility.2 The Court of Chancery granted the motion as to both claims. As to the
claim against management, the Court of Chancery held that the plaintiff “failed to
plead particularized facts that raise a reasonable doubt as to whether a majority of
[Blue Bell’s] Board could impartially consider a demand.”3 Although the complaint
alleged facts sufficient to raise a reasonable doubt as to the impartiality of a number
of Blue Bell’s directors, the plaintiff ultimately came up one short in the Court of
Chancery’s judgment: the plaintiff needed eight directors for a majority, but only
had seven.
As to the Caremark claim, the Court of Chancery held that the plaintiff did
not plead any facts to support “his contention that the [Blue Bell] Board ‘utterly’
failed to adopt or implement any reporting and compliance systems.”4 Although the
plaintiff argued that Blue Bell’s board had no supervisory structure in place to
oversee “health, safety and sanitation controls and compliance,” the Court of
Chancery reasoned that “[w]hat Plaintiff really attempts to challenge is not the
existence of monitoring and reporting controls, but the effectiveness of monitoring
2
App. to Answering Br. at B48–134 (Defendants’ Opening Br. in Support of their Joint Motion to
Dismiss (Oct. 30, 2017)); see also Court of Chancery Rule 23.1.
3
Marchand v. Barnhill, 2018 WL 4657159, at *16 (Del. Ch. Sept. 27, 2018).
4
Id. at *18.
2
and reporting controls in particular instances,” and “[t]his is not a valid theory under
. . . Caremark.”5
In this opinion, we reverse as to both holdings.
We first hold that the complaint pleads particularized facts sufficient to create
a reasonable doubt that an additional director, W.J. Rankin, could act impartially in
deciding to sue Paul Kruse, Blue Bell’s CEO, and his subordinate Greg Bridges,
Blue Bell’s Vice President of Operations, due to Rankin’s longstanding business
affiliation and personal relationship with the Kruse family.6 According to the
complaint, Rankin worked at Blue Bell for decades and owes his entire career to Ed
Kruse, the current CEO’s father, who hired Rankin as his administrative assistant in
1981 and promoted him five years later to the position of CFO, a position Rankin
maintained until his retirement in 2014. In 2004, while serving as CFO, Rankin was
elected to Blue Bell’s board, and has served since then. Moreover, the complaint
alleges that the Kruse family showed its appreciation for Rankin not only by
supporting his career, but also by leading a campaign that raised over $450,000 to
name a building at the local university after Rankin. Despite the defendants’
contentions that Rankin’s relationship with the Kruse family was just an ordinary
5
Id.
6
Because we hold that the complaint pleads particularized facts supporting a reasonable inference
that Rankin could not be impartial as to suing a member of the Kruse family, we need not, and do
not, reach that issue as to the other director whose impartiality the plaintiff challenges on appeal.
3
business relationship from which Rankin would derive no strong feelings of loyalty
toward the Kruse family, these allegations are “suggestive of the type of very close
personal [or professional] relationship that, like family ties, one would expect to
heavily influence a human’s ability to exercise impartial judgment.” 7 Rankin’s
apparently deep business and personal ties to the Kruse family raise a reasonable
doubt as to whether Rankin could “impartially or objectively assess whether to bring
a lawsuit against the sued party.”8
As to the Caremark claim, we hold that the complaint alleges particularized
facts that support a reasonable inference that the Blue Bell board failed to implement
any system to monitor Blue Bell’s food safety performance or compliance. Under
Caremark and this Court’s opinion in Stone v. Ritter,9 directors have a duty “to
exercise oversight” and to monitor the corporation’s operational viability, legal
compliance, and financial performance.10 A board’s “utter failure to attempt to
assure a reasonable information and reporting system exists” is an act of bad faith in
breach of the duty of loyalty.11
7
Sandys v. Pincus, 152 A.3d 124, 130 (Del. 2016).
8
In re Oracle Corp. Derivative Litig., 824 A.2d 917, 942 (Del. Ch. 2003).
9
911 A.2d 362 (Del. 2006).
10
Id. at 364 (quoting In re Caremark Int’l Inc. Derivative Litig., 698 A.2d 959, 971 (Del.
Ch.1996)); see also In re Citigroup Inc. S’holder Derivative Litig., 964 A.2d 106, 125 (Del. Ch.
2009) (Chandler, C.).
11
Caremark, 698 A.2d at 971.
4
As a monoline company that makes a single product—ice cream—Blue Bell
can only thrive if its consumers enjoyed its products and were confident that its
products were safe to eat. That is, one of Blue Bell’s central compliance issues is
food safety. Despite this fact, the complaint alleges that Blue Bell’s board had no
committee overseeing food safety, no full board-level process to address food safety
issues, and no protocol by which the board was expected to be advised of food safety
reports and developments. Consistent with this dearth of any board-level effort at
monitoring, the complaint pleads particular facts supporting an inference that during
a crucial period when yellow and red flags about food safety were presented to
management, there was no equivalent reporting to the board and the board was not
presented with any material information about food safety. Thus, the complaint
alleges specific facts that create a reasonable inference that the directors consciously
failed “to attempt to assure a reasonable information and reporting system
exist[ed].”12
12
Id.
5
I. Background13
A. Blue Bell’s History and Operating Environment
i. History
Founded in 1907 in Brenham, Texas, Blue Bell Creameries USA, Inc. (“Blue
Bell”), a Delaware corporation, produces and distributes ice cream under the Blue
Bell banner.14 By 1919, Blue Bell’s predecessor was struggling financially. Blue
Bell’s board turned to E.F. Kruse, who took over the company that year and turned
it around. Under his leadership, the company expanded and became profitable.15
E.F. Kruse led the company until his unexpected death in 1951.16 Upon his
death, his sons, Ed F. Kruse and Howard Kruse, took over the company’s
management. Rapid expansion continued under Ed and Howard’s leadership.17 In
13
The facts come from the plaintiff’s complaint, documents incorporated by reference into the
complaint, and the Court of Chancery’s opinion based on these same documents.
14
Blue Bell Creameries USA, Inc. is a holding company. Its only assets are a 69.6 percent interest
in Blue Bell Creameries, L.P., which actually produces and distributes ice cream, and a 100 percent
interest in Blue Bell Creameries, Inc., the general partner of Blue Bell Creameries, L.P. Because
the plaintiff is a stockholder of Blue Bell Creameries USA, the Court of Chancery requested
supplemental briefing regarding the fiduciary duties of dual fiduciaries—because the holding
company and the general partner have the same executives—and a board’s responsibilities when
its only asset is a majority stake in a subsidiary. App. to Opening Br. at A275–83 (Letter from
Vice Chancellor Slights to counsel requesting supplement submissions (May 11, 2018)). But in
its decision, the Court of Chancery sensibly and properly collapsed the enterprise for purposes of
analyzing the complaint. Marchand v. Barnhill, 2018 WL 4657159, at *3 (Del. Ch. Sept. 27,
2018).
15
App. to Opening Br. at A20 (Verified Stockholder Derivative Action Complaint (Aug. 14,
2017)).
16
Id. at A20–21.
17
Id. at A21.
6
2004, Ed Kruse’s son, Paul Kruse, took over management, becoming Blue Bell’s
President and CEO.18 Ten years later, in 2014, Paul Kruse also assumed the position
of Chairman of the Board, taking the position from his retiring father.19
ii. The Regulated Nature of Blue Bell’s Industry
As a U.S. food manufacturer, Blue Bell operates in a heavily regulated
industry. Under federal law, the Food and Drug Administration (“FDA”) may set
food quality standards, require food manufacturing facilities to register with the
FDA, prohibit regulated manufacturers from placing adulterated food into interstate
commerce, and hold companies liable if they place any adulterated foods into
interstate commerce in violation of FDA rules.20 Blue Bell is “required to comply
with regulations and establish controls to monitor for, avoid and remediate
contamination and conditions that expose the Company and its products to the risk
of contamination.”21
Specifically, FDA regulations require food manufacturers to conduct
operations “with adequate sanitation principles”22 and, in line with that obligation,
“must prepare . . . and implement a written food safety plan.”23 As part of a
18
Id. at A28–29.
19
Id.20
See 21 U.S.C. §§ 333, 341, 342, 350.
21
App. to Opening Br. at A28 (Verified Stockholder Derivative Action Complaint (Aug. 14,
2017)).
22
21 C.F.R. § 110.80.
23
Id. § 117.3.
7
manufacturer’s food safety plan, the manufacturer must include processes for
conducting a hazard analysis that identifies possible food safety hazards, identifies
and implements preventative controls to limit potential food hazards, implements
process controls, implements sanitation controls, and monitors these preventative
controls. Appropriate corporate officials must monitor these preventative controls.24
Not only is Blue Bell subject to federal regulations, but it must also adhere to
various state regulations. At the time of the listeria outbreak, Blue Bell operated in
three states, and each had issued rules and regulations regarding the proper handling
and production of food to ensure food safety.25
B. Plaintiff’s Complaint
With that context out of the way, we briefly summarize the plaintiff’s well-
pled factual allegations and the reasonable inferences drawn from them.
The complaint starts by observing that, as a single-product food company,
food safety is of obvious importance to Blue Bell.26 But despite the critical nature
of food safety for Blue Bell’s continued success, the complaint alleges that
management turned a blind eye to red and yellow flags that were waved in front of
it by regulators and its own tests, and the board—by failing to implement any system
24
Marchand v. Barnhill, 2018 WL 4657159, at *9–11 (Del. Ch. Sept. 27, 2018).
25
Id.26
App. to Opening Br. at A9 (Verified Stockholder Derivative Action Complaint (Aug. 14, 2017))
8
to monitor the company’s food safety compliance programs—was unaware of any
problems until it was too late.27
i. The Run-Up to the Listeria Outbreak
According to the complaint, Blue Bell’s issues began to emerge in 2009. At
that time, Paul Kruse, Blue Bell’s President and CEO, and his cousin, Paul Bridges,
were responsible for the three plants Blue Bell operated in Texas, Oklahoma, and
Alabama.28 The complaint alleges that, despite being responsible for overseeing
plant operations, Paul Kruse and Bridges failed to respond to signs of trouble in the
run up to the listeria outbreak. From 2009 to 2013 several regulators found troubling
compliance failures at Blue Bell’s facilities:
 In July 2009, the FDA’s inspection of the Texas facility revealed
“two instances of condensation, one from a pipe carrying liquid
caramel [that] was dripping into three gallon cartons waiting to
be filled, and one dripping into ice cream sandwich wafers.”29
The FDA reported these observations directly to Paul Kruse, who
assured the FDA that “condensation is treated by Blue Bell as a
serious concern.”30
 In March 2010, the Alabama Department of Health inspected the
Alabama plant and “found equipment left on the floor and a
ceiling in disrepair in the container forming room.”31
 Two months later, in May 2010, the FDA returned to the Texas
plant “and observed ten violations that were cited to Paul Kruse
27
Id. at A9–11.
28
Id. at A21.
29
Id. at A25.
30
Id. at A33.
31
Id.9
including, again, a condensation drip.”32 While the condensation
drip persisted from the FDA’s last inspection of the Texas plant,
the FDA also observed “ripped and open containers of
ingredients, inconsistent hand-washing and glove use and a
spider and its web near the ingredients.”33
 In July 2011, an inspection by “the Alabama Department of
Public Health cited drips from a ceiling unit and pipelines,
standing water, open tank lids and unprotected measuring
cups.”34
 Nine months later, in March 2012, an inspection of the Oklahoma
facility revealed the plant’s “‘[f]ailure to manufacture foods
under conditions and controls necessary to minimize
contamination’ and ‘[f]ailure to handle and maintain equipment,
containers and utensils used to hold food in [sic] manner that
protects against contamination.’”35
 That same month, in March 2012, “[t]he Alabama Department of
Public Health required five changes” to the Alabama facility,
“including instructions to clean various rooms and items, make
repairs and [sic] after fruit processing to prevent
contamination.”36 A year later, “in March 2013, the Alabama
Department of Public Health again ordered cleaning and repairs
and observed an uncapped fruit tank.”37 The Alabama
Department of Public Health made similar observations in a July
2014 inspection.38
Regulatory inspections during this time were not the only signal that Blue Bell
faced potential health safety risks. In 2013, “the Company had five positive tests”
32
Id.33
Id. at A34.
34
Id.35
Id.36
Id.37
Id.38
Id.10
for listeria,39 and in January 2014, “the Company received a presumptive positive
[l]isteria result reports from the third party laboratory for the [Oklahoma] facility
on January 20, 2014 and the samples reported positive for a second time on January
24, 2014.”40
Although management had received reports about listeria’s growing presence
in Blue Bell’s plants, the complaint alleges that the board never received any
information about listeria or more generally about food safety issues. Minutes from
the board’s January 29, 2014 meeting “reflect no report or discussion of the
increasingly frequent positive tests that had been occurring since 2013 or the third
party lab reports received in the preceding two weeks.”41 Board meeting minutes
from February and March likewise reflect no board-level discussion of listeria.42
During the rest of 2014, Blue Bell’s problems accelerated, but the board
remained uninformed about Blue Bell’s problems. In April, “[t]he Company
received further positive [l]isteria lab tests regarding [the Oklahoma facility].”43
That same month, the company had three “positive coliform tests far above the
known legal regulator limits.”44 Yet, minutes from the April board meeting reflected
39
Id. at A49–50.
40
Id. at A52.
41
Id.42
Id. (“[T]here is no reference to Listeria or the lab reports in the minutes of the February or March
2014 meetings.”).
43
Id.44
Id. at A49–50.
11
no discussion of listeria. Instead, the minutes note only that the Oklahoma and
Alabama facilities’ “plant operations were discussed briefly” and that Bridges also
discussed “a good report from the TCEQ [Texas Commission on Environmental
Quality].”45
Over the course of 2014, Blue Bell received ten positive tests for listeria.
According to the complaint, these positive tests “included repeated positive results
from the Company’s third party laboratory in 2014, on consecutive samples,
evidencing the inadequacy of the Company’s remedial methods to eliminate the
contamination.”46
Despite management’s knowledge of the growing problem, the complaint
alleges that this information never made its way to the board, and the board
continued to be uninformed about (and thus unaware of) the problem. Minutes from
the board’s 2014 meetings are bereft of reports on the listeria issues. Only during
the September meeting is sanitation discussed, when Bridges informed the board that
“[t]he recent Silliker audit [Blue Bell’s third-party auditor for sanitation issues in
2014] went well.”47 This lone reference to a third-party audit is the only instance,
45
Id. at A170 (Minutes to April 29, 2014 board meeting).
46
Id. at A49 (Verified Stockholder Derivative Action Complaint (Aug. 14, 2017)).
47
Id. at A180 (Minutes to September 30, 2014 board meeting). See also Marchand, 2018 WL
4657159, at *6 n.72.
12
until the listeria outbreak forced the recall of Blue Bell’s products, of any board-
level discussion regarding food safety.
At this stage of the case, we are bound to draw all fair inferences in the
plaintiff’s favor from the well-pled facts. Based on this chronology of events, the
plaintiffs have fairly pled that:
 Blue Bell had no board committee charged with monitoring food
safety;
 Blue Bell’s full board did not have a process where a portion of
the board’s meetings each year, for example either quarterly or
biannually, were specifically devoted to food safety compliance;
and
 The Blue Bell board did not have a protocol requiring or have
any expectation that management would deliver key food safety
compliance reports or summaries of these reports to the board on
a consistent and mandatory basis. In fact, it is inferable that there
was no expectation of reporting to the board of any kind.
In short, the complaint pleads that the Blue Bell board had made no effort at all to
implement a board-level system of mandatory reporting of any kind.
ii. The Listeria Outbreak and the Board’s Response
Blue Bell’s listeria problem spread in 2015. Starting in January 2015, one of
Blue Bell’s product tests had positive coliform levels above legal limits.48 The same
48
App. to Opening Br. at A49–50 (Verified Stockholder Derivative Action Complaint (Aug. 14,
2017)).
13
result appeared in February 2015.49 And by this point, the problem spread to Blue
Bell’s products and spiraled out of control.
On February 13, 2015, “Blue Bell received notification that the Texas
Department of State Health Services also had positive tests for [l]isteria in Blue Bell
samples.”50 The Texas Department of State Health Services was alerted to these
positive tests by the South Carolina Health Department.51 Company swabs at the
Texas facility on February 19 and 21, 2015 tested positive for listeria.52 Yet despite
these reports to management, Blue Bell’s board was not informed by management
about the severe problem. The board met on February 19, 2015, following Blue
Bell’s annual stockholders meeting, but there was no listeria discussion.53
Four days later, Blue Bell initiated a limited recall.54 Two days after that,
Blue Bell’s board met, and Bridges reported that “[t]he FDA is working with Texas
health inspectors regarding the Company’s recent recall of products. More
information is developing and should be known within the next days or weeks.”55
Despite two years of evidence that listeria was a growing problem for Blue Bell, this
is the first time the board discussed the issue, according to the complaint and the
49
Id.50
Id. at A36, A54.
51
Id. at A54–55.
52
Id.53
Id. at A55.
54
Marchand v. Barnhill, 2018 WL 4657159, at *7 (Del. Ch. Sept. 27, 2018).
55
App. to Opening Br. at A55 (Verified Stockholder Derivative Action Complaint (Aug. 14,
2017)).
14
incorporated board minutes. Instead of holding more frequent emergency board
meetings to receive constant updates on the troubling fact that life-threatening
bacteria was found in its products, Blue Bell’s board left the company’s response to
management.
And the problem got worse, with awful effects. “In early March 2015, health
authorities reported that they suspected a connection between human [l]isteria
infections in Kansas and products made by Blue Bell’s [Texas] facility.” 56 The
outbreak in Kansas matched a listeria strain found in Blue Bell’s products in South
Carolina. And by March 23, 2015, Blue Bell was forced to recall more products.
Two days later, Blue Bell’s board met and adopted a resolution “express[ing]
support for Blue Bell’s CEO, management, and employees and encourag[ing] them
to ensure that everything Blue Bell manufacture[s] and distributes is a wholesome
and good testing [sic] product that our consumers deserve and expect.”57
Blue Bell expanded the recall two weeks later, and less than a month later, on
April 20, 2015, Blue Bell “instituted a recall of all products.”58 By this point, the
Center for Disease Controls and Prevention (“CDC”) had begun an investigation and
discovered that the source of the listeria outbreak in Kansas was caused by Blue
56
Id. at A36.
57
Id. at A56–57.
58
Id. at A37.
15
Bell’s Texas and Oklahoma plants.59 Ultimately, five adults in Kansas and three
adults in Texas were sickened by Blue Bell’s products; three of the five Kansas
adults died because of complications due to listeria infection.60 The CDC issued a
recall to grocers and retailers, alerting them to the contamination and warning them
against selling the products.61
After Blue Bell’s full product recall, the FDA inspected each of the company’s
three plants. Each was found to have major deficiencies. In the Texas plant, the
FDA found a “failure to manufacture foods under conditions and controls necessary
to minimize the potential for growth of microorganisms,” inadequate cleaning and
sanitizing procedures, “failure to maintain buildings in repair sufficient to prevent
food from coming [sic] adulterated,” and improper construction of the building that
failed to prevent condensation from occurring.62 Likewise, at the Oklahoma facility,
“[t]he FDA found that the Company had been receiving increasingly frequent
positive [l]isteria tests at [the Oklahoma facility] for over three years,” failed “to
manufacture and package foods under conditions and controls necessary to minimize
the potential growth of microorganisms and contamination,” failed to perform
testing to ferret out microbial growth, implemented inadequate cleaning and
59
Id. at A37–38.
60
Id. at A37.
61
Id.62
Id. at A38; see also id. at A77–80 (Food and Drug Administration Inspection Report for Blue
Bell Creameries facility in Brenham, Texas (May 1, 2015)).
16
sterilization procedures, failed to provide running water at an appropriate
temperature to sanitize equipment, and failed to store food in clean and sanitized
portable equipment.63
Although the Alabama facility fared better, the FDA still found contamination
and several issues, including the “failure to perform microbial testing where
necessary to identify possible food contamination,” “failure to maintain food contact
surfaces to protect food from contamination by any source,” and inadequate
construction of the facility such that condensation was likely.64 Most of these
findings, the complaint alleges, are unsurprising because similar deficiencies were
found by the FDA and state regulators in the run up to the listeria outbreak, yet
according to the FDA’s inspection after the fact, it appeared that neither management
nor the board made progress on remedying these deficiencies.
After the fact, various news outlets interviewed former Blue Bell employees
who “claimed that Company management ignored complaints about factory
conditions in [the Texas facility].”65 One former employee “reported [that] spilled
ice cream was left to pool on the floor, ‘creating an environment where bacteria
63
Id. at A38–39 (Verified Stockholder Derivative Action Complaint (Aug. 14, 2017)); see also id.at A82–91 (Food and Drug Administration Inspection Record for Blue Bell Creameries facility in
Broken Arrow, Oklahoma (Apr. 23, 2015)).
64
Id. at A40–41 (Verified Stockholder Derivative Action Complaint (Aug. 14, 2017)); see also id.at A94–96 (Food and Drug Administration Inspection Report for Blue Bell Creameries facility in
Sylacauga, Alabama (Apr. 30, 2015)).
65
Id. at A35 (Verified Stockholder Derivative Action Complaint (Aug. 14, 2017)).
17
could flourish.’”66 Another former employee described being “instructed to pour ice
cream and fruit that dripped off his machine into mix to be used later.”67
iii. The Aftermath of the Listeria Outbreak
With its operations shuttered, Blue Bell faced a liquidity crisis. Blue Bell
initially sought a more traditional credit facility to bridge its liquidity, but after Blue
Bell director W.J. Rankin informed his brother-in-law, Bill Reimann, about Blue
Bell’s liquidity crunch, Blue Bell ended up striking a deal with Moo Partners, a fund
controlled by Sid Bass and affiliated with Reimann.68 Moo Partners provided Blue
Bell with a $125 million credit facility and purchased a $100 million warrant to
acquire 42% of Blue Bell at $50,000 per share.69 As part of Moo Partners’s
investment conditions, Blue Bell also amended its certificate of incorporation to
grant Moo the right to appoint one member of Blue Bell’s board who would be
entitled to one-third of the board’s voting power (or five votes based on a then-10-
member board).
After investing in Blue Bell, Moo named Reimann to Blue Bell’s board,
expanding the board to 11 members with Reimann possessing five votes.70 In
February 2016, Reimann suggested that the board separate the roles of CEO and
66
Id.67
Id. at A35–36.
68
Id. at A42–43.
69
Id.70
Id. at A46.
18
Chairman (both held by Paul Kruse). The board voted to follow Reimann’s
recommendation at its February 18th meeting, but after Paul Kruse disagreed with
the recommendation and threatened to resign as President and CEO if the split
occurred, the board held another vote in which all members, except Reimann and
Rankin, voted to restore the position of CEO and Chairman of the board.71
C. The Court of Chancery Dismisses the Case
After requesting Blue Bell’s books and records through a § 220 request, the
plaintiff, a Blue Bell stockholder, sued Blue Bell’s management and board
derivatively, asserting two claims based on management’s alleged failure to respond
appropriately to the red and yellow flags about growing food safety issues and the
board’s violation of its duty of loyalty, under Caremark, by failing to implement any
reporting system and therefore failing to inform itself about Blue Bell’s food safety
compliance. The Court of Chancery dismissed both claims, holding that the plaintiff
failed to plead demand futility.
As to the first claim, the plaintiff alleges that Paul Kruse, Blue Bell’s President
and CEO, and Bridges, Blue Bell’s Vice President of Operations, had breached their
duties of loyalty and care by knowingly disregarding contamination risks and failing
to oversee Blue Bell’s operations and food safety compliance process.72 “Because
71
Id. at A57–59.
72
Id. at A67 (asserting a “derivative claim for breach of fiduciary duties of loyalty and care for
knowingly disregard of contammination [sic] risks and failure to oversee Blue Bell’s operation
and compliance”).
19
directors are empowered to manage, or direct the management of, the business and
affairs of the corporation,” the plaintiff’s complaint must allege facts suggesting that
“demand is excused because the directors are incapable of making an impartial
decision regarding such litigation.”73 The plaintiff’s complaint claims that “[a]
demand upon the Board of the Company to pursue claims against Paul Kruse and
Bridges . . . would be futile” because “the Kruse family—of which both Paul Kruse
and Bridges are members—ha[s] long dominated Blue Bell” and the majority of
directors are “long-time employees and/or otherwise beholden and loyal to the Kruse
family.”74
But the Court of Chancery held that the plaintiff “failed to plead particularized
facts to raise a reasonable doubt that a majority of the [Blue Bell board] members
could have impartially considered a pre-suit demand.”75 Without belaboring the
details of the Court of Chancery’s thorough analysis, which is somewhat
complicated due to the unusual structure of Blue Bell’s board, we note that the court
essentially ruled that the plaintiff came up one vote short. To survive the Rule 23.1
motion to dismiss, the complaint needed to allege particularized facts raising a
reasonable doubt that directors holding eight of the 15 votes could have impartially
73
Rales v. Blasband, 634 A.2d 927, 932 (Del. 1993).
74
App. to Opening Br. at A62 (Verified Stockholder Derivative Action Complaint (Aug. 14,
2017)).
75
Marchand v. Barnhill, 2018 WL 4657159, at *2 (Del. Ch. Sept. 27, 2018).
20
considered a demand, but the court held that the plaintiff had done so for directors
holding only seven votes.
One of the directors who the trial court held could consider demand
impartially was Rankin, Blue Bell’s recently retired former CFO. Although Rankin
worked at Blue Bell for 28 years, the court emphasized that he was no longer
employed by Blue Bell, having retired in 2014. As to the allegations that donations
from the Kruse family resulted in a building at Blinn College being named for
Rankin, the court noted that “the Complaint provide[d] no more specifics regarding
the donation (i.e., who gave how much), and ma[de] no attempt to characterize the
materiality of the gesture.”76 That failure, the Court of Chancery concluded, fell
short of Rule 23.1’s particularity requirement. Further, the court noted that Rankin
voted against rescinding a board initiative to split the CEO and Chairman positions
held by Paul Kruse.77 In the court’s view, that act was evidence that Rankin was not
beholden to the Kruse family. Ultimately, the Court of Chancery concluded that the
plaintiff’s “allegation that Rankin lacks independence falls flat.”78
The Court of Chancery also rejected the plaintiff’s second claim that Blue
Bell’s directors breached their duty of loyalty under Caremark by failing to “institute
76
Id. at *15.
77
Id.
78
Id.
21
a system of controls and reporting” regarding food safety. 79 In support of this claim,
the plaintiff asserted, based on the facts alleged in the complaint and reasonable
inferences from those facts, that: (1) the Blue Bell board had no committee
overseeing food safety; (2) Blue Bell’s board did not have any reporting system in
place about food safety; (3) management knew about the growing listeria issues but
did not report those issues to the board, further evidence that the board had no food
safety reporting system in place; and (4) the board did not discuss food safety at its
regular board meetings.
Rejecting the plaintiff’s Caremark claim, the Vice Chancellor started by
observing that “[d]espite the far-reaching regulatory schemes that governed Blue
Bell’s operations at the time of the [l]isteria contamination, the Complaint contains
no allegations that Blue Bell failed to implement the monitoring and reporting
systems required by the FDCA [Federal Food, Drug, and Cosmetic Act], FDA
regulations or state statutes (or that it was ever cited for such a failure).”80 In fact,
the Court of Chancery concluded that “documents incorporated by reference in the
Complaint reveal that Blue Bell distributed a sanitation manual with standard
operating and reporting procedures, and promulgated written procedures for
79
App. to Opening Br. at A68–69 (Verified Stockholder Derivative Action Complaint (Aug. 14,
2017)).
80
Marchand, 2018 WL 4657159, at *11.
22
processing and reporting consumer complaints.”81 And at the board level, the Vice
Chancellor noted that “[b]oth Bridges and Paul Kruse . . . provided regular reports
regarding Blue Bell operations to the . . . Board,” including reports about audits of
Blue Bell’s facilities.82
Based on Blue Bell’s compliance with FDA regulations, ongoing third-party
monitoring for contamination, and consistent reporting by senior management to
Blue Bell’s board on operations, the Court of Chancery concluded that there was a
monitoring system in place. At bottom, the Court of Chancery opined that “[w]hat
Plaintiff really attempts to challenge is not the existence of monitoring and reporting
controls, but the effectiveness of monitoring and reporting controls in particular
instances.”83 That, the Court of Chancery held, does not state a Caremark claim. As
a result, the court held that demand was not excused as to the Caremark claims and
dismissed the complaint.
The plaintiff timely appealed from that dismissal.
81
Id. at *17.
82
Id.
83
Id. at *18 (emphasis in original).
23
II. Analysis
We review a motion to dismiss for failure to plead demand futility de novo.84
A. Rankin’s Independence
We first address the plaintiff’s claim that the Court of Chancery erred by
holding that the complaint did not allege particularized facts that raise a reasonable
doubt as to whether directors holding a majority of the board’s votes could
impartially consider demand as to the management claims. The Court of Chancery
concluded that four directors representing eight votes were independent and that
seven directors representing seven votes were not independent. On appeal, the
plaintiff challenges the Court of Chancery’s conclusion as to only Rankin and one
other director, Paul Ehlert. Holding that the Court of Chancery erred as to either
director would be dispositive. Because we hold that Rankin was not independent
for demand futility purposes, we reverse and need not and do not address whether
Ehlert was independent.
On appeal, both parties agree that the Rales standard applies,85 and we
therefore use it to determine whether the Court of Chancery erred in finding that a
majority of the board was independent for pleading stage purposes. “[A] lack of
84
Beam ex rel. Martha Stewart Living Omnimedia, Inc. v. Stewart, 845 A.2d 1040, 1048 (Del.
2004) (“This Court reviews de novo a decision of the Court of Chancery to dismiss a derivative
suit under Rule 23.1.”).
85
See Rales v. Blasband, 634 A.2d 927, 932–34 (Del. 1993).
24
independence turns on ‘whether the plaintiffs have pled facts from which the
director’s ability to act impartially on a matter important to the interested party can
be doubted because that director may feel either subject to the interested party’s
dominion or beholden to that interested party.”86 When it comes to life’s more
intimate relationships concerning friendship and family, our law cannot “ignore the
social nature of humans” or that they are motivated by things other than money, such
as “love, friendship, and collegiality.”87
The standard for conducting this inquiry at the demand futility stage is well
balanced, requiring that the plaintiff plead facts with particularity, but also requiring
that this Court draw all reasonable inferences in the plaintiff’s favor.88 That is, the
plaintiff cannot just assert that a close relationship exists, but when the plaintiff
pleads specific facts about the relationship—such as the length of the relationship or
86
Sandys v. Pincus, 152 A.3d 124, 128 (Del. 2016) (quoting Del. Cty. Emps. Ret. Fund v. Sanchez,
124 A.3d 1017, 1024 n.25 (Del. 2015)).
87
In re Oracle Corp. Derivative Litig., 824 A.2d 917, 938 (Del. Ch. 2003) (“Delaware law should
not be based on a reductionist view of human nature that simplifies human motivations on the lines
of the least sophisticated notions of the law and economics movement.”); see also Sanchez, 124
A.3d at 1022 (“Close friendships of that duration are likely considered precious by many people,
and are rare. People drift apart for many reasons, and when a close relationship endures for that
long, a pleading stage inference arises that it is important to the parties.”).
88
Sanchez, 124 A.3d at 1022 (“In that consideration, it cannot be ignored that although the plaintiff
is bound to plead particularized facts in pleading a derivative complaint, so too is the court bound
to draw all inferences from those particularized facts in favor of the plaintiff, not the defendant,
when dismissal of a derivative complaint is sought.”).
25
details about the closeness of the relationship—then this Court is charged with
making all reasonable inferences from those facts in the plaintiff’s favor.89
From the pled facts, there is reason to doubt Rankin’s capacity to impartially
decide whether to sue members of the Kruse family. For starters, one can reasonably
infer that Rankin’s successful career as a businessperson was in large measure due
to the opportunities and mentoring given to him by Ed Kruse, Paul Kruse’s father,
and other members of the Kruse family. The complaint alleges that Rankin started
as Ed Kruse’s administrative assistant and, over the course of a 28-year career with
the company, rose to the high managerial position of CFO.90 Not only that, but
Rankin was added to Blue Bell’s board in 2004,91 which one can reasonably infer
was due to the support of the Kruse family. Capping things off, the Kruse family
spearheaded charitable efforts that led to a $450,000 donation to a key local college,
resulting in Rankin being honored by having Blinn College’s new agricultural
facility named after him.92 On a cold complaint, these facts support a reasonable
inference that there are very warm and thick personal ties of respect, loyalty, and
affection between Rankin and the Kruse family, which creates a reasonable doubt
89
Id. (holding that at the pleading stage this Court is “bound to draw all inferences from those
particularized facts in favor of the plaintiff, not the defendant, when dismissal of a derivative
complaint is sought”).
90
App. to Opening Br. at A17–18 (Verified Stockholder Derivative Action Complaint (Aug. 14,
2017).
91
Id.92
Id.26
that Rankin could have impartially decided whether to sue Paul Kruse and his
subordinate Bridges.
Even though Rankin had ties to the Kruse family that were similar to other
directors that the Court of Chancery found were sufficient at the pleading stage to
support an inference that they could not act impartially in deciding whether to cause
Blue Bell to sue Paul Kruse,93 the Court of Chancery concluded that because Rankin
had voted differently from Paul Kruse on a proposal to separate the CEO and
Chairman position, these ties did not matter.94 In doing so, the Court of Chancery
ignored that the decision whether to sue someone is materially different and more
important than the decision whether to part company with that person on a vote about
corporate governance, and our law’s precedent recognizes that the nature of the
decision at issue must be considered in determining whether a director is
independent.95 As important, at the pleading stage, the Court of Chancery was bound
93
Marchand v. Barnhill, 2018 WL 4657159, at *14–15 (Del. Ch. Sept. 27, 2018) (holding that two
directors who both worked at Blue Bell for most, if not all, of their entire careers were beholden
to the Kruse family and therefore not independent for demand futility).
94
Id. at *15.
95
See Sandys v. Pincus, 152 A.3d 124, 134 (Del. 2016) (“Causing a lawsuit to be brought against
another person is no small matter, and is the sort of thing that might plausibly endanger a
relationship.”); Sciabacucchi v. Liberty Broadband Corp., 2018 WL 3599997, at *14 (Del. Ch.
July 26, 2018) (“It is reasonable to infer that, if Zinterhofer voted to authorize a derivative suit
against Malone, the relationship between Searchlight and Liberty Global might be in jeopardy.
After all, ‘[c]ausing a lawsuit to be brought against another person is no small matter, and is the
sort of thing that might plausibly endanger a relationship.’”); In re Oracle Corp. Derivative Litig.,
824 A.2d 917, 940 (Del. Ch. 2003) (“In evaluating the independence of a special litigation
committee, this court must take into account the extraordinary importance and difficulty of such a
committee’s responsibility. It is, I daresay, easier to say no to a friend, relative, colleague, or boss
27
to accord the plaintiff the benefit of all reasonable inferences, and the pled facts
fairly support the inference that Rankin owes an important debt of gratitude and
friendship to the Kruse family for giving him his first job, nurturing his progress
from an entry level position to a top manager and director, and honoring him by
spearheading a campaign to name a building at an important community institution
after him. Although the fact that fellow directors are social acquaintances who
occasionally have dinner or go to common events does not, in itself, raise a fair
inference of non-independence,96 our law has recognized that deep and long-
standing friendships are meaningful to human beings and that any realistic
consideration of the question of independence must give weight to these important
relationships and their natural effect on the ability of the parties to act impartially
toward each other. As in cases like Sandys v. Pincus97 and Delaware County
Employees Retirement Fund v. Sanchez,98 the important personal and business
who seeks assent for an act (e.g., a transaction) that has not yet occurred than it would be to cause
a corporation to sue that person. This is admittedly a determination of so-called ‘legislative fact,’
but one that can be rather safely made. Denying a fellow director the ability to proceed on a matter
important to him may not be easy, but it must, as a general matter, be less difficult than finding
that there is reason to believe that the fellow director has committed serious wrongdoing and that
a derivative suit should proceed against him.”) (footnotes omitted).
96
See Beam ex rel. Martha Stewart Omnimedia, Inc. v. Stewart, 845 A.2d 1040, 1051–52 (Del.
2004).
97
152 A.3d 124, 130 (Del. 2016) (holding that owning an airplane with the interested party “is
suggestive of the type of very close personal relationship that, like family ties, one would expect
to heavily influence a human’s ability to exercise impartial judgment”).
98
124 A.3d 1017, 1020–22 (Del. 2015) (holding that being “close personal friends for more than
five decades” with the interested party gives rise to “a pleading stage inference . . . that it is
important to the parties” and suggests that the director is not independent).
28
relationship that Rankin and the Kruse family have shared supports a pleading-stage
inference that Rankin cannot act independently.
Because the complaint pleads particularized facts that raise a reasonable doubt
as to Rankin’s independence, we reverse the Court of Chancery’s dismissal of the
plaintiff’s claims against management for failure to adequately plead demand
futility.
B. The Caremark Claim
The plaintiff also challenges the Court of Chancery’s dismissal of his
Caremark claim. Although Caremark claims are difficult to plead and ultimately to
prove out,99 we nonetheless disagree with the Court of Chancery’s decision to
dismiss the plaintiff’s claim against the Blue Bell board.
Under Caremark and Stone v. Ritter, a director must make a good faith effort
to oversee the company’s operations.100 Failing to make that good faith effort
breaches the duty of loyalty and can expose a director to liability. In other words,
99
See Stone v. Ritter, 911 A.2d 362, 372 (Del. 2006) (“[A] claim that directors are subject to
personal liability for employee failures is possibly the most difficult theory in corporation law
upon which a plaintiff might hope to win a judgment.”) (internal quotation marks omitted);
Guttman v. Huang, 823 A.2d 492, 506 (Del. Ch. 2003) (“A Caremark claim is a difficult one to
prove.”); In re Caremark Int’l Inc. Derivative Litig., 698 A.2d 959, 967 (Del. Ch. 1996) (“The
theory here advanced is possibly the most difficult theory in corporation law upon which a plaintiff
might hope to win a judgment.”).
100
Caremark, 698 A.2d at 970 (“[I]t is important that the board exercise a good faith judgment
that the corporation’s information and reporting system is in concept and design adequate to assure
the board that appropriate information will come to its attention in a timely manner as a matter of
ordinary operations, so that it may satisfy its responsibility.”).
29
for a plaintiff to prevail on a Caremark claim, the plaintiff must show that a fiduciary
acted in bad faith—“the state of mind traditionally used to define the mindset of a
disloyal director.”101
Bad faith is established, under Caremark, when “the directors [completely]
fail[] to implement any reporting or information system or controls[,] or . . . having
implemented such a system or controls, consciously fail[] to monitor or oversee its
operations thus disabling themselves from being informed of risks or problems
requiring their attention.”102 In short, to satisfy their duty of loyalty, directors must
make a good faith effort to implement an oversight system and then monitor it.
As with any other disinterested business judgment, directors have great
discretion to design context- and industry-specific approaches tailored to their
companies’ businesses and resources.103 But Caremark does have a bottom-line
requirement that is important: the board must make a good faith effort—i.e., try—to
101
Desimone v. Barrows, 924 A.2d 908, 935 (Del. Ch. 2007).
102
Stone, 911 A.2d at 370–72.
103
In re Citigroup Inc. S’holder Derivative Litig., 964 A.2d 106, 125–26 (Del. Ch. 2009)
(Chandler, C.) (noting that Caremark “does not eviscerate the core protections of the business
judgment rule”); Caremark, 698 A.2d at 970 (“Obviously the level of detail that is appropriate for
such an information system is a question of business judgment.”); Desimone, 924 A.2d at 935 n.95
(noting that the approaches boards take to monitoring the corporation under their Caremark duty
“will obviously vary because of the different circumstances corporations confront”); see also
Caremark, 698 A.2d at 971 (“But, of course, the duty to act in good faith to be informed cannot
be thought to require directors to possess detailed information about all aspects of the operation of
the enterprise. Such a requirement would simple [sic] be inconsistent with the scale and scope of
efficient organization size in this technological age.”).
30
put in place a reasonable board-level system of monitoring and reporting.104 Thus,
our case law gives deference to boards and has dismissed Caremark cases even when
illegal or harmful company activities escaped detection, when the plaintiffs have
been unable to plead that the board failed to make the required good faith effort to
put a reasonable compliance and reporting system in place.105
For that reason, our focus here is on the key issue of whether the plaintiff has
pled facts from which we can infer that Blue Bell’s board made no effort to put in
place a board-level compliance system. That is, we are not examining the
effectiveness of a board-level compliance and reporting system after the fact.
Rather, we are focusing on whether the complaint pleads facts supporting a
reasonable inference that the board did not undertake good faith efforts to put a
board-level system of monitoring and reporting in place.
104
Stone, 911 A.2d at 370; see also Caremark, 698 A.2d at 971 (“Generally where a claim of
directorial liability for corporate loss is predicated upon ignorance of liability creating activities
within the corporation, . . . only a sustained or systematic failure of the board to exercise
oversight—such as an utter failure to attempt to assure a reasonable information and reporting
system exists—will establish the lack of good faith that is a necessary condition to liability.”).
105
See, e.g., Stone, 911 A.2d at 372–73 (dismissing a Caremark claim despite the fact that the
company violated the Bank Secrecy Act and was fined $50 million); In re General Motors
Derivative Litig., 2015 WL 3958724, at *1, 17 (Del. Ch. 2015) (dismissing a Caremark claim
despite the fact that the company’s actions “led to monetary loss on the part of the corporation, via
fines, damages and punitive damages from lawsuits; reputational damage; and most distressingly,
personal injury and death to GM customers”); In re Citigroup Inc. S’holder Derivative Litig., 964
A.2d at 127 (dismissing a Caremark claim despite the fact that the company suffered billions of
dollars in losses because of its exposure to subprime mortgages).
31
Under Caremark, a director may be held liable if she acts in bad faith in the
sense that she made no good faith effort to ensure that the company had in place any
“system of controls.”106 Here, the plaintiff did as our law encourages and sought out
books and records about the extent of board-level compliance efforts at Blue Bell
regarding what has to be one of the most central issues at the company: whether it is
ensuring that the only product it makes—ice cream—is safe to eat.107 Using these
books and records, the complaint fairly alleges that before the listeria outbreak
engulfed the company:
 no board committee that addressed food safety existed;
 no regular process or protocols that required management to keep
the board apprised of food safety compliance practices, risks, or
reports existed;
 no schedule for the board to consider on a regular basis, such as
quarterly or biannually, any key food safety risks existed;
 during a key period leading up to the deaths of three customers,
management received reports that contained what could be
considered red, or at least yellow, flags, and the board minutes
of the relevant period revealed no evidence that these were
disclosed to the board;
106
Stone, 911 A.2d at 370; see also Caremark, 698 A.2d at 971 (“Generally where a claim of
directorial liability for corporate loss is predicated upon ignorance of liability creating activities
within the corporation, . . . only a sustained or systematic failure of the board to exercise
oversight—such as an utter failure to attempt to assure a reasonable information and reporting
system exists—will establish the lack of good faith that is a necessary condition to liability.”).
107
Though, to be fair and completely accurate, Blue Bell does make a few other related products,
such as frozen yogurt.
32
 the board was given certain favorable information about food
safety by management, but was not given important reports that
presented a much different picture; and
 the board meetings are devoid of any suggestion that there was
any regular discussion of food safety issues.
And the complaint goes on to allege that after the listeria outbreak, the FDA
discovered a number of systematic deficiencies in all of Blue Bell’s plants—such as
plants being constructed “in such a manner as to [not] prevent drip and condensate
from contaminating food, food-contact surfaces, and food-packing material”—that
might have been rectified had any reasonable reporting system that required
management to relay food safety information to the board on an ongoing basis been
in place.108
In sum, the complaint supports an inference that no system of board-level
compliance monitoring and reporting existed at Blue Bell. Although Caremark is a
tough standard for plaintiffs to meet, the plaintiff has met it here. When a plaintiff
can plead an inference that a board has undertaken no efforts to make sure it is
informed of a compliance issue intrinsically critical to the company’s business
operation, then that supports an inference that the board has not made the good faith
effort that Caremark requires.
108
App. to Opening Br. at A94–96 (Food and Drug Administration Inspection Report for Blue
Bell Creameries facility in Sylacauga, Alabama (Apr. 30, 2015)).
33
In defending this case, the directors largely point out that by law Blue Bell
had to meet FDA and state regulatory requirements for food safety, and that the
company had in place certain manuals for employees regarding safety practices and
commissioned audits from time to time.109 In the same vein, the directors emphasize
that the government regularly inspected Blue Bell’s facilities, and Blue Bell
management got the results.110
But the fact that Blue Bell nominally complied with FDA regulations does not
imply that the board implemented a system to monitor food safety at the board
level.111 Indeed, these types of routine regulatory requirements, although important,
are not typically directed at the board. At best, Blue Bell’s compliance with these
requirements shows only that management was following, in a nominal way, certain
standard requirements of state and federal law. It does not rationally suggest that
the board implemented a reporting system to monitor food safety or Blue Bell’s
operational performance. The mundane reality that Blue Bell is in a highly regulated
109
Answering Br. at 28–29.
110
Answering Br. at 28–29; see also Marchand v. Barnhill, 2018 WL 4657159, at *17 (Del. Ch.
Sept. 27, 2018) (“[D]ocuments incorporated by reference in the Complaint reveal that Blue Bell
distributed a sanitation manual with standard operating and reporting procedures, and promulgated
written procedures for processing and reporting consumer complaints. Blue Bell engaged a third-
party laboratory and food safety auditor to test for the presence of dangerous contaminates in its
facilities.”).
111
Stone, 911 A.2d at 368 (“To the contrary, the Caremark Court stated, ‘it is important that the
board exercise a good faith judgment that the corporation’s information and reporting system is in
concept and design adequate to assure the board that appropriate information will come to its
attention in a timely manner as a matter of ordinary operations, so that it may satisfy its
responsibility.’”) (quoting Caremark, 698 A.2d at 970) (emphasis added).
34
industry and complied with some of the applicable regulations does not foreclose
any pleading-stage inference that the directors’ lack of attentiveness rose to the level
of bad faith indifference required to state a Caremark claim.
In answering the plaintiff’s argument, the Blue Bell directors also stress that
management regularly reported to them on “operational issues.” This response is
telling. In decisions dismissing Caremark claims, the plaintiffs usually lose because
they must concede the existence of board-level systems of monitoring and oversight
such as a relevant committee, a regular protocol requiring board-level reports about
the relevant risks, or the board’s use of third-party monitors, auditors, or
consultants.112 For example, in Stone v. Ritter, although the company paid $50
112
See, e.g., City of Birmingham Ret. Sys. v. Good, 177 A.3d 47, 59 (Del. 2017) (affirming the
Court of Chancery’s dismissal of a Caremark claim because “reports to the board showed that the
board ‘exercised oversight by relying on periodic reports’ from the officers” and that board
presentations “identified issues with the coal ash disposal ponds, but also informed the board of
the actions taken to address the regulatory concerns”); Stone, 911 A.2d at 372–73 (affirming the
Court of Chancery’s dismissal of a Caremark claim, in part, because an outside auditor’s report
“reflect[s] that the Board received and approved relevant policies and procedures, delegated to
certain employees and departments the responsibility for filing [suspicious activity reports] and
monitoring compliance, and exercised oversight by relying on periodic reports from them”); In re
General Motors Derivative Litig., 2015 WL 3958721, at *14 (Del. Ch. 2015) (dismissing a
Caremark claim where “GM had a system for reporting risk to the Board, but in the Plaintiffs’
view it should have been a better system”); In re Citigroup Inc. S’holder Derivative Litig., 964
A.2d 106, 127 (Del. Ch. 2009) (dismissing a Caremark claim because “[p]laintiffs do not contest
that Citigroup had procedures and controls in place that were designed to monitor risk”); Desimone
v. Barrows, 924 A.2d 908, 940 (Del. Ch. 2007) (dismissing a Caremark claim premised on the
plaintiff’s allegations that a properly formed and well-functioning audit committee must have
known about options backdating despite the fact that management intentionally kept this
information from the audit committee); Guttman v. Huang, 823 A.2d 492, 506–07 (Del. Ch. 2003)
(dismissing a Caremark claim because the plaintiff failed to plead any particularized facts about
the audit committee’s lack of reporting or information systems).
35
million in fines related “to the failure by bank employees” to comply with “the
federal Bank Secrecy Act,”113 the“[b]oard dedicated considerable resources to the
[Bank Secrecy Act] compliance program and put into place numerous procedures
and systems to attempt to ensure compliance.”114 Accordingly, this Court affirmed
the Court of Chancery’s dismissal of a Caremark claim. Here, the Blue Bell
directors just argue that because Blue Bell management, in its discretion, discussed
general operations with the board, a Caremark claim is not stated.
But if that were the case, then Caremark would be a chimera. At every board
meeting of any company, it is likely that management will touch on some operational
issue. Although Caremark may not require as much as some commentators wish,115
it does require that a board make a good faith effort to put in place a reasonable
system of monitoring and reporting about the corporation’s central compliance risks.
In Blue Bell’s case, food safety was essential and mission critical. The complaint
pled facts supporting a fair inference that no board-level system of monitoring or
reporting on food safety existed.
113
911 A.2d at 365–66.
114
Id. at 371.
115
See, e.g., John Armour, et al., Board Compliance, 104 MINNESOTA L. REV. (forthcoming 2020)
(manuscript at 47), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3205600; John Armour
& Jeffrey N. Gordon, Systemic Harms and Shareholder Value, 6 J. LEGAL ANALYSIS 35, 46 (2014);
Hillary A. Sale, Monitoring Caremark’s Good Faith, 32 DEL. J. CORP. L. 719, 753 (2007).
36
If Caremark means anything, it is that a corporate board must make a good
faith effort to exercise its duty of care. A failure to make that effort constitutes a
breach of the duty of loyalty. Where, as here, a plaintiff has followed our
admonishment to seek out relevant books and records116 and then uses those books
and records to plead facts supporting a fair inference that no reasonable compliance
system and protocols were established as to the obviously most central consumer
safety and legal compliance issue facing the company, that the board’s lack of efforts
resulted in it not receiving official notices of food safety deficiencies for several
years, and that, as a failure to take remedial action, the company exposed consumers
to listeria-infected ice cream, resulting in the death and injury of company
customers, the plaintiff has met his onerous pleading burden and is entitled to
discovery to prove out his claim.
III. Conclusion
We therefore reverse the Court of Chancery’s decision and remand for
proceedings consistent with this opinion.
116
See Sandys v. Pincus, 152 A.3d 124, 128 (Del. 2016) (“For many years, this Court and the
Court of Chancery have advised derivative plaintiffs to take seriously their obligations to plead
particularized facts justifying demand excusal.”).
37