92 Cal.App.5th 191
Cal. Ct. App.2023Background
- Sempra Energy (through subsidiary SoCalGas) operated the Aliso Canyon underground gas storage facility where a major leak occurred from Oct 2015–Feb 2016, causing >$1.1 billion in losses.
- Shareholders (Kanter, Favors, Lewis, Erste) sued derivatively alleging directors breached fiduciary duties by failing to implement/monitor a board-level reporting and safety program for storage wells; no presuit demand was made, plaintiffs alleged demand futility.
- The Board had an Environmental, Health, Safety & Technology Committee (formed 2000) that met and reported to the Board; Board minutes showed periodic risk reports and SoCalGas’s SIMP proposal in a CPUC rate case.
- Sempra’s articles limited director liability to the fullest extent permitted by California law (Cal. Corp. Code §204.5), excluding only intentional misconduct, knowing violations, reckless disregard, or abdication of duty.
- Trial court sustained demurrers for failure to plead demand futility with particularity under Cal. Corp. Code §800; plaintiffs appealed and the Court of Appeal affirmed dismissal.
- A concurring/dissenting opinion argued plaintiffs had alleged a plausible Caremark claim (complete lack of reporting system) and so demand futility should be found.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether plaintiffs pleaded presuit demand futility with particularity under Cal. Corp. Code §800 | Demand excused because the Board completely abdicated oversight of underground storage wells and had no board-level reporting system | Plaintiffs’ allegations are generalized and fail to particularize facts as to each director; the minutes show some oversight and reporting | Affirmed dismissal — allegations not sufficiently particular to excuse demand |
| Which substantive standard governs director liability / substantial likelihood of liability (Caremark vs. California §309) | California §309’s "reasonable inquiry" duty governs and differs materially from Delaware law | Delaware Caremark framework is appropriate guidance and is consistent with California law and Sempra’s charter limits under §204.5 | Court applies Caremark/Rales guidance; concludes Caremark is consistent with §204.5 and applicable here |
| Whether plaintiffs pleaded a Caremark claim (substantial likelihood of director liability for oversight failures) | Alleged facts (warnings by engineers, 2013 leaks, absence of reporting to Board, ineffective Aliso safety plan, SIMP not implemented) show bad faith/abdication | Board and Committee minutes, annual risk reports, Committee meetings, and SIMP filings show some board-level oversight and reporting | Plaintiffs failed to allege particularized facts showing an utter failure to implement or consciously not monitor a reporting system; Caremark claim not sufficiently pleaded |
| Whether the Board’s response to a separate shareholder demand (Fazio) proves futility for these plaintiffs | Board’s handling/refusal of Fazio’s demand demonstrates any similar demand would be futile | Board eventually formed a review committee and later refused Fazio’s demand; that sequence does not retroactively excuse plaintiffs’ failure to plead particularized demand futility | Mootness/insufficiency: eventual refusal does not by itself show futility; does not excuse plaintiffs’ failure to make a demand under Rales/Caremark |
Key Cases Cited
- In re Caremark Int’l Inc., 698 A.2d 959 (Del. Ch. 1996) (oversight liability arises where directors fail to implement or monitor information/reporting systems in bad faith)
- Marchand v. Barnhill, 212 A.3d 805 (Del. 2019) (Clarifies Caremark: bad faith shown by complete failure to implement or conscious failure to monitor compliance systems)
- Rales v. Blasband, 634 A.2d 927 (Del. 1993) (demand futility test where the board did not make the challenged business decision)
- Stone v. Ritter, 911 A.2d 362 (Del. 2006) (Caremark explains oversight liability as rooted in bad faith; sustained or systematic failure to exercise oversight)
- Aronson v. Lewis, 473 A.2d 805 (Del. 1984) (test for director disinterest/independence when challenged board decision exists)
- Bader v. Anderson, 179 Cal.App.4th 775 (Cal. Ct. App. 2009) (discusses California demand requirement and particularity; looks to Delaware tests for guidance)