Cases and Materials on Corporations by Taylor B. Ellen & Williams Jack F. & Gregory William A. & Hurst Thomas R

Author:Taylor, B. Ellen & Williams, Jack F. & Gregory, William A. & Hurst, Thomas R.
Language: eng
Format: epub
Publisher: LexisNexis
Published: 2014-07-15T16:00:00+00:00

STONE v. RITTER

Supreme Court of Delaware

911 A.2d 362 (2006)

Holland, Justice:

This is an appeal from a final judgment of the Court of Chancery dismissing a derivative complaint against fifteen present and former directors of AmSouth Bancorporation (“AmSouth”), a Delaware corporation. The plaintiffs-appellants, William and Sandra Stone, are AmSouth shareholders and filed their derivative complaint without making a pre-suit demand on AmSouth’s board of directors (the “Board”). The Court of Chancery held that the plaintiffs had failed to adequately plead that such a demand would have been futile. The Court, therefore, dismissed the derivative complaint under Court of Chancery Rule 23.1.

The Court of Chancery characterized the allegations in the derivative complaint as a “classic Caremark claim,” a claim that derives its name from In re Caremark Int’l Deriv. Litig., 698 A.2d 959 (Del. Ch. 1996). In Caremark, the Court of Chancery recognized that: “[g]enerally 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.” Id. at 971.

In this appeal, the plaintiffs acknowledge that the directors neither “knew [n]or should have known that violations of law were occurring,” i.e., that there were no “red flags” before the directors. Nevertheless, the plaintiffs argue that the Court of Chancery erred by dismissing the derivative complaint which alleged that “the defendants had utterly failed to implement any sort of statutorily required monitoring, reporting or information controls that would have enabled them to learn of problems requiring their attention.” The defendants argue that the plaintiffs’ assertions are contradicted by the derivative complaint itself and by the documents incorporated therein by reference.

Consistent with our opinion in In re Walt Disney Co. Deriv. Litig, 906 A.2d 27 (Del. 2006), we hold that Caremark articulates the necessary conditions for assessing director oversight liability. We also conclude that the Caremark standard was properly applied to evaluate the derivative complaint in this case. Accordingly, the judgment of the Court of Chancery must be affirmed.

Facts

This derivative action is brought on AmSouth’s behalf by William and Sandra Stone, who allege that they owned AmSouth common stock “at all relevant times.” The nominal defendant, AmSouth, is a Delaware corporation with its principal executive offices in Birmingham, Alabama. During the relevant period, AmSouth’s wholly-owned subsidiary, AmSouth Bank, operated about 600 commercial banking branches in six states throughout the southeastern United States and employed [525/526]more than 11,600 people.

In 2004, AmSouth and Amsouth Bank paid $40 million in fines and $10 million in civil penalties to resolve government and regulatory investigations pertaining principally to the failure by bank employees to file “Suspicious Activity Reports” (“SARs”), as required by the federal Bank Secrecy Act (“BSA”) and various anti-money-laundering (“AML”) regulations. Those investigations were conducted by the United States Attorney’s Office for the Southern District of Mississippi (“USAO”), the Federal Reserve, FinCEN and the Alabama Banking Department.

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