Delaware Supreme Court Reverses Dismissal of Bad Faith Claim Against Directors: The Court Finds Bad Faith Adequately Pled by Allegations That Company Had No Board Level System for Monitoring or Reporting on Food Safety Issues

Sullivan & Cromwell LLP - June 20, 2019
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In a decision issued yesterday in Marchand v. Barnhill et al., No. 533, 2018 (Del. June 19, 2019), the Delaware Supreme Court reversed the dismissal of a stockholder derivative lawsuit against the members of the board of directors and two officers of Blue Bell Creameries USA, Inc., a leading manufacturer of ice cream products.  The lawsuit arose out of a serious food contamination incident in 2015 that resulted in widespread product recalls and was linked to three deaths.  The Delaware Supreme Court, applying the “duty to monitor” doctrine enunciated in In re Caremark International, Inc. Derivative Litigation, 698 A.2d 959 (Del. Ch. 1996), and noting the very high hurdle to claims under it, nonetheless ruled that the plaintiff had adequately alleged the requisite bad faith by the members of the Blue Bell board.  Plaintiff did so by using information obtained in a Section 220 books and records demand to show facts supporting their contention that the Company did not have in place “a reasonable board-level system of monitoring and reporting” with respect to food safety, which the Court deemed to be “a compliance issue intrinsically critical to the company’s business.”  After concluding that “food safety was essential and mission critical” to Blue Bell’s business, the Supreme Court ruled that bad faith was adequately pled by alleging “that no board-level system of monitoring or reporting on food safety existed.”  The Court thus declined to dismiss a claim that the directors breached their duty of loyalty, potentially exposing directors to non-exculpated (and potentially not indemnifiable) monetary damages.