In re The Chemours Company Derivative Litigation
CA No. 2020-0786-SG (Consol.)
| Del. Ch. | Nov 1, 2021Background
- Chemours was spun off from DuPont in 2015 and assumed large, contingent environmental liabilities (PFAS/PFOA/GenX); DuPont provided so-called "Maximums" for those liabilities in connection with the Spin‑Off.
- Chemours’ board approved two repurchase programs (2017, 2018; ~ $1.07B spent) and multiple dividend increases (~ $667M paid through Feb. 2021) while receiving regular updates on environmental litigation and reserves.
- In May 2019 Chemours filed suit against DuPont seeking to enforce the Maximums; the complaint alleged that if Chemours were responsible for liabilities above the Maximums it would have been insolvent at the time of the Spin‑Off.
- Stockholders filed a derivative complaint under 8 Del. C. §§ 160, 170, 173, 174 and fiduciary‑duty theories, alleging the board negligently/willfully authorized unlawful distributions by relying on GAAP reserves that understated contingent liabilities; they sought to excuse pre‑suit demand as futile.
- Defendants moved to dismiss; the Court evaluated whether plaintiffs pleaded particularized facts showing a majority of directors faced a substantial likelihood of liability (demand futility) and whether directors were protected by Section 172 reliance and by the corporation’s exculpatory charter clause.
- Holding: the Court granted dismissal in full — plaintiffs failed to plead particularized facts creating a reasonable doubt that a majority of the board could exercise business judgment; Section 172 reliance applied and most dividends complied with statutory net‑profits safe harbor.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether demand is excused because a majority of directors face substantial likelihood of liability under 8 Del. C. § 174 for unlawful repurchases/dividends | Board ignored contingent environmental liabilities by relying on GAAP reserves that excluded probable but unrecorded contingent claims; that reliance was negligent or willful | Plaintiffs failed to plead particularized facts showing the board acted negligently or in bad faith; GAAP reliance is permissible and directors are protected under § 172 when relying in good faith on records, officers, and experts | Demand not excused; complaint lacks particularized facts of negligence/willfulness; § 172 reliance protects directors; dismissal granted |
| Whether the board’s surplus determinations violated Sections 160/170/173 (i.e., whether distributions exceeded "surplus") | GAAP reserves understated contingent liabilities; the board should have revalued liabilities (no discounting) and would have lacked surplus | Kling precedent permits deference to reasonable methods that reflect present values (including probabilistic discounting); plaintiffs’ use of DuPont complaint figures does not show those amounts were unrecognized or excluded when distributions were authorized | Court applied Klang standard: plaintiffs did not plead that board’s surplus calc was so far off the mark; plaintiffs’ reliance on DuPont Complaint figures did not establish lack of surplus; no substantial likelihood of liability |
| Whether directors can invoke § 172 (good‑faith reliance on records, officers, experts) at pleading stage | § 172 is an affirmative defense not to be resolved at pleading stage | § 172 can be considered where complaint and incorporated documents show directors relied on corporate records, officers, and advisors | § 172 was available at pleading stage here: the complaint and incorporated materials show the board received advisors’ presentations and reserve analyses; directors were fully protected |
| Whether breach of fiduciary duty (bad faith) was adequately pleaded | Even if statutory requirements were met, board breached duties by authorizing returns when company risked insolvency | Charter exculpates duty‑of‑care claims (except bad faith); bad‑faith standard requires conscious disregard and particularized facts showing scienter | Plaintiffs pleaded no particularized facts of conscious disregard; bad faith not shown; claims dismissed |
| Whether claims against officer‑defendants (sales, duty of candor) survive because board would be disabled | Plaintiffs argue related facts implicate same directors and therefore demand is futile for officer claims too | Those claims stand or fall with the showing that a majority of the board is disabled; plaintiffs failed to show such disability | Demand not excused for officer claims; derivative claims dismissed |
Key Cases Cited
- Klang v. Smith's Food & Drug Centers, Inc., 702 A.2d 150 (Del. 1997) (sets standard for judicial deference to board surplus determinations and requires surplus valuations reasonably reflecting present values)
- Brehm v. Eisner, 746 A.2d 244 (Del. 2000) (discusses pleading‑stage application of reliance defenses where complaint admits directors relied on experts)
- Van Gorkom v. Transoceanic, 488 A.2d 858 (Del. 1985) (extreme example of director liability where board acted without adequate information or deliberation)
- Stifel Financial Corp. v. Cochran, 809 A.2d 555 (Del. 2002) (explains corporate indemnification and purpose of director protections)
- Malpiede v. Townson, 780 A.2d 1075 (Del. 2001) (permits consideration of certain charter defenses at the pleading stage)