In re The Chemours Company Derivative Litigation ( 2021 )

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
)
IN RE THE CHEMOURS COMPANY ) CONSOLIDATED
DERIVATIVE LITIGATION ) C.A. No. 2020-0786-SG
)
MEMORANDUM OPINION
Date Submitted: July 19, 2021
Date Decided: November 1, 2021
Gregory V. Varallo, of BERNSTEIN LITOWITZ BERGER & GROSSMANN LLP,
Wilmington, Delaware; OF COUNSEL: Mark Lebovitch and Daniel E. Meyer, of
BERNSTEIN LITOWITZ BERGER & GROSSMANN LLP, New York, New York;
and Robert D. Klausner and Stuart A. Kaufman, of KLAUSNER KAUFMAN
JENSEN & LEVINSON, Plantation, Florida, Attorneys for Plaintiff City of Hialeah
Employees’ Retirement System.
Gregory V. Varallo, of BERNSTEIN LITOWITZ BERGER & GROSSMANN LLP,
Wilmington, Delaware; OF COUNSEL: Gustavo F. Bruckner and Daryoush
Behbood, of POMERANTZ LLP, New York, New York; Kip B. Shuman, of
SHUMAN, GLENN & STECKER, San Francisco, California; Rusty E. Glenn, of
SHUMAN, GLENN & STECKER, Denver, Colorado; and Brett D. Stecker, of
SHUMAN, GLENN & STECKER, Ardmore, Pennsylvania, Attorneys for Plaintiff
Roberto Pinto.
Joel Friedlander, Jeffrey Gorris, and Christopher Foulds, of FRIEDLANDER &
GORRIS, P.A., Wilmington, Delaware; OF COUNSEL: Jonathan M. Moses, Ryan
A. McLeod, and Justin L. Brooke, of WACHTELL, LIPTON, ROSEN & KATZ,
New York, New York, Attorneys for the Defendants.
GLASSCOCK, Vice Chancellor
Broadly speaking, the Delaware General Corporation Law (“DGCL”) is an
enabling corporate statute, that allows for self-ordering where defaults are eschewed,
and, in conjunction with our common law, allows for the broad discretion of
corporate fiduciaries exercising their business judgement on behalf of the company.
That said, some provisions of the DCGL are proscriptive. Currently at issue are two
such provisions, Sections 160 and 173. Those sections prohibit the corporation from
repurchase of stock or issuance of dividends where those distributions would exceed
(generally speaking) corporate surplus. 1 This prohibition is, obviously, to protect
the entity and, more specifically, its creditors.
Sections 160 and 173 are enforceable under Section 174. That section
provides that, in the case where the corporation “wilful[ly] or negligen[tly]” has
violated Sections 160 or 173, directors “under whose administration” the violation
occurred are “jointly and severally liable” to the corporation, and to its creditors in
the event of corporate dissolution or insolvency. As written, the statute appears to
be incongruent with the general limitation on liability of directors solely to damages
for gross negligence (unless exculpated) or loyalty breaches. Section 174, indeed,
appears to impose strict and several liability on any director vicariously for the
negligence of another corporate actor as well as for her own negligence, and impose
1
As explained in the analysis section of this Memorandum Opinion, this statement is an over-
simplification in aid of clarity.
as damages the full amount paid out even if no actual harm to the corporate interest
ultimately manifests itself.2
The Plaintiffs, Chemours Company stockholders, seek to impose such liability
here. The Chemours Company (“Chemours” or the “Company”) was spun off from
E. I. DuPont de Nemours and Company (“DuPont”) in 2015 (the “Spin-Off”). At
that time, DuPont transferred certain environmental liabilities to Chemours, the size
of which, per Chemours, were vastly understated by DuPont. In 2019, Chemours
sued DuPont, arguing that if the contractual agreement between these entities was
interpreted as transferring all such environmental liabilities to Chemours, above
DuPont’s estimate, the Spin-Off was illegal because Chemours would be rendered
insolvent ab initio. This Court found that the matter was governed by an arbitration
clause, and dismissed; ultimately, the parties settled by agreeing to divide
responsibility for the environmental liabilities.
Before and during the pendency of that dispute, Chemours made stock
repurchases and issued dividends. The Chemours board of directors (the “Board”)
justified these expenditures based on corporate surplus using GAAP principles, as
explained to them by external advisors and corporate officers. The Plaintiffs contend
2
That is, where, as here, the distributions are not alleged to have redounded “to the detriment of
creditors [or] the long-term health of the corporation,” the twin evils addressed by the statutes. See
Klang v. Smith’s Food & Drug Centers, Inc, 702 A.2d 150, 154 (Del. 1997) (stating “purpose
behind Section 160”).
2
that the expenditures resulted from negligent or willful wrongdoing, exposing the
Director Defendants (defined below) to liability. They argue that Chemours’s
allegations in the DuPont litigation demonstrate that the entity was aware that (given
the contingent environmental liabilities) it had no surplus; and that to rely on GAAP,
which the Plaintiffs contend did not require accounting for such liabilities, was
willful wrongdoing, or negligence. There is no question at present that Chemours is
solvent; nonetheless, the Plaintiffs seek to proceed derivatively on behalf of the
corporation to compel liability on behalf of the Director Defendants in favor of
Chemours. With respect to the dividends, at least, the Plaintiffs are in the unusual
position of having received what they allege was an improper distribution, while
seeking to benefit from the Director Defendants repaying that distribution to the
company whose stock they hold.
In order to proceed derivatively, the Plaintiffs must meet the demand
requirement of Rule 23.1. The Plaintiffs argue that demand is excused here, solely
on the ground that a majority of the directors could not bring their business judgment
to bear because each faces a substantial risk of liability.
Upon consideration, I find that the Plaintiffs have failed to plead specific facts
that, if true, imply that the Director Defendants face a substantial likelihood of
liability. As a consequence, I do not find that the Complaint raises a reasonable
doubt that the majority of the Board would be able to bring its business judgment to
3
bear, making demand futile. In assessing what appears to be the stringent liability
provision of Section 174, I find that the section must be read in conjunction with the
specific provision of Section 172, which provides that directors are “fully protected”
from liability—including, I find, liability under Section 174—if they rely in good
faith upon corporate records, officers or experts, insulating the Director Defendants
from liability here. In any event, I find that the facts pled do not make reliance on
GAAP to determine corporate surplus, under the circumstances alleged, sufficient to
imply willful or negligent misconduct. Accordingly, demand is not excused, and the
matter must be dismissed.
My reasoning is below.
4
I. BACKGROUND 3
A. The Parties and Relevant Non-Parties
Lead Plaintiff City of Hialeah Employees’ Retirement System (“Hialeah
Retirement”) is a Chemours common stockholder.4
Additional Plaintiff Roberto Pinto is also a Chemours common stockholder.5
Nominal Defendant Chemours is a Delaware corporation with principal
executive offices in Wilmington, Delaware. 6 Chemours provides industrial and
specialty chemicals products to various markets, including plastics and coatings,
refrigeration and air conditioning, general industrial, electronics, mining, and oil
refining. 7 Chemours is structured into three main segments: Fluoroproducts,
Chemical Solutions, and Titanium Technologies.8 Chemours was spun off from
3
Unless otherwise noted, the facts referenced in this Memorandum Opinion are drawn from the
Verified Stockholder Derivative Complaint (referred to herein as the “Complaint”) and the
documents incorporated therein. See generally Verified Stockholder Derivative Compl., Roberto
Pinto v. Mark Vergnano, et al., C.A. No. 2021-0152-SG (Dkt. No. 1), [hereinafter the
“Complaint”]. I may also consider documents produced by the Defendants in response to the
Plaintiffs’ 8 Del. C. § 220 books and records demand “to ensure that the plaintiff has not
misrepresented their contents and that any inference the plaintiff seeks to have drawn is a
reasonable one.” Voigt v. Metcalf, 2020 WL 614999, at *9 (Del. Ch. Feb. 10, 2020). Citations in
the form of “Friedlander Decl. —” refer to the Transmittal Declaration Pursuant to 10 Del. C. §
3927 of Joel Friedlander in Support of Defendants’ Memorandum of Law in Support of
Defendants’ Motion to Dismiss the Verified Stockholder Derivative Complaint, Dkt. No. 26.
Citations in the form of “Friedlander Decl., Ex. —” refer to the exhibits attached to the Friedlander
Declaration, Dkt. Nos. 26–27.
4
Verified Stockholder Derivative Compl., Dkt. No. 1 ¶ 27.
5
Compl. ¶ 31.
6
Id. ¶ 32.
7
Id.
8
Id.
5
DuPont on approximately July 1, 2015, and as of December 31, 2020, employed
approximately 6,500 employees.9
Defendant Mark P. Vergnano has been Chemours’s President, CEO, and a
director since July 2015.10
Defendant Richard H. Brown has been the Chairman of Chemours’s Board
since July 2015. 11 Brown also served as a member of DuPont’s board of directors
from 2001 to 2015.12
Defendant Curtis V. Anastasio has been a Chemours director since July 2015,
and a member of the Board’s Audit Committee (the “Audit Committee”) since
March 2016.13
Defendant Bradley J. Bell has been a Chemours director since July 2015. 14
Bell is also the Chairman of the Audit Committee, of which he has been a member
since March 2016.15
Defendant Mary B. Cranston has been a Chemours director since July 2015
and a member of the Audit Committee since March 2016.16
9
Id.
10
Id. ¶ 33.
11
Id. ¶ 34.
12
Id.
13
Id. ¶ 35.
14
Id. ¶ 36.
15
Id.
16
Id. ¶ 37.
6
Defendant Curtis J. Crawford has been a Chemours director since July 2015
and a member of the Audit Committee since March 2016.17 Crawford was also a
member of DuPont’s board of directors from 1998 to 2015.18
Defendant Dawn L. Farrell has been a Chemours director since July 2015. 19
Defendant Sean D. Keohane has been a Chemours director since May 2018.20
Defendant Erin N. Kane has been a Chemours director since June 2019 and a
member of the Audit Committee since July 2019.21
Defendant Stephen D. Newlin was a Chemours director from July 2015 to
May 2018. 22
Defendant Mark E. Newman has been Chemours’s Senior Vice President
since November 2014 and its Chief Operating Officer since June 2019.23 Newman
was also Chemours’s Chief Financial Officer from November 2014 to June 2019. 24
Defendants Newman and Vergnano are referred to as the “Officer
Defendants.” Defendants Vergnano, Brown, Anastasio, Bell, Cranston, Crawford,
Farrell, Keohane, Kane, and Newlin are referred to as the “Director Defendants.”
17
Id. ¶ 38.
18
Id.
19
Id. ¶ 39.
20
Id. ¶ 40.
21
Id. ¶ 41.
22
Id. ¶ 42.
23
Id. ¶ 43.
24
Id.
7
Non-party DuPont is the former parent of Chemours.25 DuPont merged with
The Dow Chemical Company (“Dow”) on August 31, 2017, forming the world’s
largest chemical conglomerate (“DowDuPont”).26 In April 2019, DowDuPont
separated into three companies: Dow, Inc., a producer of commodity chemicals;
DuPont de Nemours, Inc., a producer of specialty chemicals; and Corteva, Inc.,
which is focused on agriculture.27
B. Factual Background
1. The Environmental Liabilities
The Complaint alleges that DuPont was exposed to massive environmental
liabilities, which it then purportedly transferred to Chemours in connection with the
Spin-Off. Specifically, DuPont’s Performance Chemicals division, which was the
division that DuPont spun off to form Chemours, manufactured certain apparently
toxic chemical substances, including perfluoroalkyl and polyfluoroalkyl substances
(“PFAS”) and, in particular, a type of PFAS known as perfluorooctanic acid
(“PFOA”).28 PFAS are man-made industrial components used in a variety of
household products, including non-stick cookware, water repellants, and coated
papers used to package food.29 They are designed for extreme durability, and
25
Id. ¶ 45.
26
Id. ¶ 46.
27
Id.
28
Id. ¶¶ 47–48, 50.
29
Id. ¶ 48.
8
therefore do not break down in the environment.30 PFAS also allegedly “bio-
accumulate” in the blood streams of people and animals that are exposed to
contaminated water or air. 31 Bio-accumulation of PFAS, in turn, purportedly
contributes to or causes adverse health effects, including fatal cancers. 32
As the public became aware of the risks associated with PFAS, DuPont faced
nation-wide litigation concerning the discharge of PFAS into the environment by its
Performance Chemical division.33 Much of this litigation remained unresolved at
the time of the Spin-Off.34
2. The Chemours Spin-Off
Beginning in 2013, DuPont commenced a plan, dubbed “Project Beta,” that
culminated in the spin-off of DuPont’s Performance Chemicals division as an
independent, publicly traded company, Chemours. 35 DuPont announced the Spin-
Off in October 2013, and it also determined that the “spinco” (i.e., Chemours) would
pay a dividend of $3.3 billion to DuPont, funded with billions of dollars in debt. 36
As Project Beta progressed, certain members of incoming Chemours
management expressed concerns about the health of Chemours’s capital structure
30
Id.
31
Id.
32
Id.
33
Id. ¶ 53; see also id. ¶¶ 54–55.
34
See, e.g., id. ¶ 75.
35
Id. ¶ 58.
36
Id. ¶ 61.
9
following the Spin-Off.37 For example, in June 2015, Defendant Newman,
Chemours’s then-CFO, requested an addition $200-300 million in cash reserves for
Chemours, which DuPont rejected.38 Chemours also expressed concerns about the
potential effects of a $100 million Chemours dividend that DuPont, as Chemours’s
then-parent and controller, declared for the last quarter prior to the Spin-Off. 39
As a condition to the Spin-Off, DuPont’s board of directors commissioned
Houlihan Lokey to opine on the solvency of DuPont and Chemours after the Spin-
Off.40 Houlihan Lokey’s analysis included a quantification of the environmental
liabilities that DuPont was transferring to Chemours in connection with the Spin-
Off.41 To quantify the environmental liabilities, Houlihan Lokey used numbers
supplied by DuPont, labeled the “High End (Maximum) Realistic Exposure” for
each of the liabilities (the “Maximums”).42
The Complaint alleges that the Maximums understated the environmental
liabilities because they were calculated from figures used to prepare DuPont’s
account reserves, which only included liabilities that were both probable and
reasonably estimable. 43 Thus, according to the Complaint, the Maximums excluded
37
Id. ¶¶ 64–65.
38
Id. ¶ 65.
39
Id.
40
Id. ¶ 67.
41
Id. ¶ 68.
42
Id.
43
Id. ¶¶ 69–70.
10
any environmental liabilities that were viewed as merely “possible,” as opposed to
“probable,” as of December 31, 2014, even if they were reasonably estimable, as
well as any environmental liabilities that were probable but not yet reasonably
estimable at that time. 44 In May 2015, DuPont approached Defendant Newman to
certify the Maximums for 87 categories of liabilities being transferred to
Chemours.45 Defendant Newman declined to do so, and instead signed a revised
certification stating that he was relying on DuPont as to the accuracy of the
Maximums.46
On June 5, 2015, DuPont announced that its board of directors approved the
Spin-Off, which took effect on July 1, 2015.47 In connection with the Spin-Off,
Chemours assumed various liabilities, including 67% of DuPont’s environmental
liabilities covering 80 sites and $4 billion in debt used to fund a $3.91 billion
dividend back to DuPont. 48
Under the separation agreement between DuPont and Chemours that governed
the Spin-Off (the “Separation Agreement”), Chemours was required to defend and
indemnify DuPont against any liability “relating to, arising out of, by reason of or
otherwise in connection with” the liabilities assigned by DuPont to Chemours,
44
Id. ¶ 70.
45
Id. ¶ 72.
46
Id.
47
Id. ¶ 73.
48
Id. ¶ 74–75.
11
without limitation.49 The Separation Agreement also prohibited Chemours from
seeking recourse from DuPont concerning those liabilities. 50 Following the Spin-
Off, in December 2015, the Board approved individual indemnification agreements
for the Chemours directors.51
3. Chemours Undertakes the Five-Point Transformation Plan
According to the Complaint, Chemours struggled in the immediate aftermath
of the Spin-Off.52 For example, the Company laid off 1,000 employees, closed
plants, sold certain business lines, and undertook two corporate restructurings.53 The
Company’s stock price fell from $21.00 per share to $11.40 per share within a month
of the Spin-Off, and by January 25, 2016, the share price had fallen further to $3.06
per share. 54
As a result, the Company took steps to improve its capital structure pursuant
to a plan called the “Five-Point Transformation Plan,” the purpose of which was to
get “the company de-levered as quickly as possible.” 55 For instance, in November
2015, Chemours announced that it would sell a facility in Beaumont, Texas to Dow
for $140 million in cash.56 In addition, in February 2016, Chemours obtained a $190
49
Id. ¶ 77.
50
Id.
51
Id. ¶ 80.
52
See id. § III.C.1.
53
Id. ¶ 81.
54
Id. ¶¶ 81, 83.
55
Id. ¶ 84.
56
Id. ¶ 82.
12
million advance from DuPont for goods and services to be provided to DuPont
through mid-2017.57 The Company also reduced its quarterly dividends from $0.55
per share to $0.03 per share in September 2015.58
4. The Environmental Liabilities Continue
Although the Company had taken steps to address its capital structure issues,
the environmental liabilities related to PFAS continued to loom. In particular, the
Company faced litigation in Ohio, New Jersey, and North Carolina related to PFOA
and other types of PFAS. 59
a. The Ohio Litigation
In connection with the Spin-Off, Chemours agreed to indemnify DuPont
under the Separation Agreement for a multidistrict action in the U.S. District Court
for the Southern District of Ohio against DuPont involving approximately 3,550
individuals who had been diagnosed with diseases associated with PFOA exposure
(the “Ohio MDL”). 60 DuPont certified that the Maximum for the Ohio MDL was
$128 million, including defense costs.61 In mid-2016, however, DuPont lost the first
three bellwether cases in the Ohio MDL, incurring an aggregate of $19.7 million in
57
Id. ¶ 83.
58
Id. ¶ 241. As the Defendants note, the $0.55 quarterly dividend was declared by Chemours’ pre-
Spin-Off board, when Chemours was a wholly-owned subsidiary of DuPont. See Friedlander
Decl., Ex. 15 at 35 n.1, 37 n.4.
59
See Compl. ¶¶ 93–99, 104–18.
60
Id. ¶ 55.
61
Id. ¶ 93.
13
damages. 62 And despite estimating that it would win 68% of the PFOA trials,
DuPont would go on to lose every single trial.63
As a result, Chemours notified DuPont that its indemnification obligation
under the Separation Agreement with respect to the Ohio MDL was capped at the
$128 million Maximum that DuPont had certified in connection with the Spin-Off.64
In response, in July 2016, DuPont argued that this $128 million Maximum
“represented only estimates based on the best judgment of management and its
advisors given available information at the time,” and therefore, it had no legal effect
on Chemours’s indemnification obligations.65 DuPont further argued that, instead,
Chemours was “contractually obligated to indemnify DuPont for any and all
Indemnifiable losses . . .including without limitation any and all judgments.” 66 In
February 2017, the parties agreed to settle the Ohio MDL cases for $670.7 million,
split evenly between DuPont and Chemours, and with DuPont contributing up to an
additional $125 million toward PFOA-related costs, including litigation defense.67
While the Ohio MDL settlement resolved 3,550 cases, it left unresolved other claims
related to PFOA exposure. 68
62
Id. ¶ 95.
63
Id.
64
Id. ¶ 96.
65
Id. ¶ 97.
66
Id.
67
Id. ¶ 98.
68
Id. ¶¶ 117–18.
14
b. The New Jersey Litigation
On December 12, 2016, a New Jersey municipality sued DuPont and
Chemours for over $1.1 billion for remediation costs of the Chambers Works site.69
At the time of the Spin-Off, DuPont certified a Maximum for all New Jersey
litigation of $337 million.70 Chemours also inherited three other New Jersey sites
from DuPont that become the subject of litigation.71
c. The North Carolina Litigation
Beginning in September 2017, several plaintiffs, including the State of North
Carolina, certain public water authorities, well owners, and a consolidated putative
class of North Carolina residents filed suit against Chemours and DuPont relating to
the Fayetteville Works site, which had been discharging a type of PFAS known as
“GenX.” 72 At the time of the Spin-Off, DuPont certified a Maximum for liability
relating to Fayetteville Works of $2.09 million.73
5. The Stock Repurchases and Dividends
In 2017 and 2018, the Chemours Board approved two stock repurchase
programs and increased the Company’s quarterly dividend twice. During this time,
69
Id. ¶ 104.
70
Id. ¶ 108.
71
Id. ¶¶ 108–09.
72
Id. ¶¶ 110, 112.
73
Id. ¶ 111.
15
the Board also regularly discussed and received updates regarding the environmental
liabilities.
a. The 2017 Stock Repurchase Program and Dividend
Increases
In January 2017, shortly before Chemours settled the Ohio MDL in February
2017, the Board received a financial update that discussed potential return of capital
strategies.74 The financial update observed that “Chemours’ current dividend yield
is toward the low end of the range of public chemical companies.”75 The same
financial update cautioned that any return of capital strategies “should be evaluated
in light of liquidity and credit agreement constraints from any potential settlement
of contingent liabilities . . . .” 76 The update added that “[w]hile investors would
likely applaud a share repurchase to offset dilution, management believes focus on
contingent liabilities . . . should take priority.” 77 In April 2017, Defendant Vergnano
wrote to the Board that returning capital “would reflect our confidence in the
potential to drive Chemours stock price well above current levels.” 78
In the months leading up to the approval of the 2017 Stock Repurchase
Program and the increase in dividends, the Audit Committee and the Board
discussed the environmental liabilities on several occasions. On January 3, 2017,
74
Id. ¶ 129.
75
Id.
76
Id.
77
Id.
78
Id. ¶ 130.
16
for instance, the Board received a presentation summarizing directors’ responses to
a questionnaire.79 In response to a question canvassing the topics the directors would
like to cover during the next year, one director wrote, “[w]e . . . need to assess more
carefully other potential environmental liabilities that could occur in the normal
course of business going forward once the PFOA case is behind us.” 80 Likewise, on
April 20, 2017, and again on August 1, 2017, the Audit Committee met, along with
Defendants Brown, Vergnano and Newman, and discussed litigation related to the
environmental liabilities, including legal and environmental reserves and
environmental remediation developments.81
On August 2, 2017, the Board met and received two presentations concerning
a potential share repurchase program and a potential increase in the Company’s
dividends.82 The presentations, which were delivered by financial advisors Barclays
and Dyal Partners, recommended that Chemours increase its dividends or repurchase
stock, noting that Chemours trailed its peers with respect to the return of capital to
stockholders.83 These presentations also emphasized that an increase in the return
of capital would be a positive signal to the market.84 At this meeting, the Board also
received a presentation concerning litigation developments regarding the
79
Id. ¶ 120.
80
Id.
81
Id. ¶ 132, 138.
82
Id. ¶ 141.
83
Id.
84
Id.
17
Fayetteville Works site in North Carolina. 85 On October 30, 2017, the Audit
Committee met again, with Defendants Brown, Vergnano and Newman in
attendance, received further updates regarding environmental litigation, and
discussed Chemours’s legal and environmental reserves. 86
A month later, on November 30, 2017, the Board met, with Defendant
Newman also in attendance, and approved a share repurchase program authorizing
the purchase of up to $500 million (the “2017 Stock Repurchase Program”).87 At
the same meeting, the Board also declared a first quarter 2018 dividend of $0.17 per
share, a $0.14 increase from the previous $0.03 quarterly dividends.88 The
resolutions approving the 2017 Stock Repurchase Program and the dividend increase
stated that the Board believed that the returns of capital complied with the DGCL.89
The Complaint alleges that, in making this determination, the Board only considered
GAAP-based “legal and environmental reserves.”90
In early 2018, the Board continued to receive presentations and updates
regarding the environmental litigation, as well as the Company’s legal and
environmental reserves. In January 2018, in response to a question about topics or
agenda items that should be covered during the year, one director wrote, “I would
85
Id. ¶ 140.
86
Id. ¶ 144.
87
Id. ¶ 145.
88
Id.
89
Id.
90
Id. ¶¶ 146–47.
18
personally benefit from . . . a detailed sustainability strategy that reduces the cost of
future litigation.”91 Likewise, the Audit Committee met on February 12, 2018, with
Defendants Brown, Vergnano and Newman in attendance, and received a litigation
report that included a discussion of the environmental litigation. 92 The Complaint
alleges that the Audit Committee also discussed the Company’s share repurchases,
as well as the Company’s legal and environmental reserves, but it asserts that the
Audit Committee did not discuss these topics “in conjunction” with one another.93
The following day, on February 13, 2018, the Board met, with Defendant
Newman in attendance, and was informed of the litigation update that the Audit
Committee had received the previous day.94 The Board also received an update on
litigation regarding the Fayetteville Works site,95 and a further update regarding
Fayetteville Works litigation at an April 30, 2018 Board meeting. 96
In May 2018, the Company executed its final purchase of the 2017 Stock
Repurchase Program, exhausting the $500 million limit, and the Board declared
another $0.17 per share quarterly cash dividend.97 The resolutions that approved the
dividend stated that the Board believed the dividend complied with the DGCL.98
91
Id. ¶ 151.
92
Id. ¶ 153.
93
Id. ¶ 154.
94
Id. ¶ 156.
95
Id.
96
Id. ¶ 160.
97
Id. ¶¶ 161, 163.
98
Id. ¶ 162.
19
Again, the Complaint alleges that in forming this belief, the Board relied only on
Chemours’ accounting-based reserves for the contingent environmental liabilities,
calculated in accordance with GAAP. 99 In particular, the Complaint alleges that on
May 1 and 2, 2018, the Audit Committee and the Board, along with Defendant
Newman, received updates regarding the environmental litigation and the
Company’s environmental and litigation reserves.100
b. The 2018 Stock Repurchase Program and Dividend
Increases
After the Company exhausted the $500 million 2017 Stock Repurchase
Program, the Chemours Board approved a second repurchase program in August
2018 (the “2018 Stock Repurchase Program”). Specifically, on July 30, 2018, the
Board met, along with Defendant Newman, and received a report concerning the
environmental litigation.101 The Complaint alleges that at this meeting, the Board
was informed that the Company was facing increased legal and environmental
costs. 102
The following day, on July 31, 2018, the Audit Committee met, with
Defendants Vergnano and Newman in attendance.103 At this meeting, the Audit
99
Id. ¶¶ 162, 165.
100
Id. ¶¶ 164–66.
101
Id. ¶ 167.
102
Id.
103
Id. ¶ 168.
20
Committee received a litigation report that discussed the environmental litigation.104
The Board also discussed the Company’s environmental and litigation reserves and
the Company’s share repurchases. 105 Again, however, the Complaint alleges that
there is no indication that the share repurchases were discussed “in conjunction”
with the environmental and litigation reserves.106
A day later, on August 1, 2018, the Board approved the 2018 Stock
Repurchase Program, which authorized the repurchase of up to $750 million in
shares.107 The next day, on August 2, 2018, the Board increased the quarterly cash
dividend from $0.17 per share to $0.25 per share. 108 The resolutions approving the
2018 Stock Repurchase Program and the dividend increase stated that the Board
believed the returns of capital complied with the DGCL, though the Complaint
asserts that the Board relied only on accounting-based reserves to form this belief.109
In October 2018, the Board declared another $0.25 quarterly dividend.110
Specifically, on October 29, 2018, the Audit Committee met, with Defendants
Brown, Vergnano and Newman in attendance.111 The Audit Committee discussed
the share repurchases at this meeting; received updates on the environmental
104
Id. ¶ 168–69.
105
Id.
106
Id. ¶ 169.
107
Id. ¶ 170.
108
Id. ¶ 171.
109
Id.
110
Id. ¶ 174–79.
111
Id. ¶ 174.
21
litigation, including “significant judgments”; and discussed the environmental and
litigation reserves.112 The Complaint asserts, again, that there is no indication that
the share repurchases were discussed “in conjunction” with the environmental and
litigation reserves.113
The following day, on October 30, 2018, the full Chemours Board met and
approved the $0.25 dividend. 114 At this meeting, the Board also discussed the
environmental litigation, and received an “Enterprise Risk Management”
presentation stating that “Legacy/Future Environmental-Operational Sustainability”
was the number one risk.115 Yet again, the resolutions approving the dividend stated
that the Board believed the dividend complied with the DGCL, though the
Complaint asserts that this belief was based only on accounting-based reserves.116
On November 20, 2018, the Board met telephonically, with Defendant Newman
present, and received an update on the Fayetteville Works site. 117
c. The Board Increases the 2018 Stock Repurchase Program
and Declares More Dividends
In early 2019, the Board authorized an increase in the 2018 Stock Repurchase
Program. Specifically, on February 12, 2019, the Audit Committee met, with
112
Id. ¶ 174–75.
113
Id. ¶ 175.
114
Id. ¶¶ 176–78.
115
Id. ¶ 177.
116
Id. ¶ 178.
117
Id. ¶ 180.
22
Defendants Brown, Vergnano and Newman in attendance. 118 At this meeting, the
Company received a litigation update, discussed “reserve accounting for [the]
Fayetteville” site, and discussed the Company’s share repurchases. 119 As with prior
meetings, the Complaint asserts that there is no indication that the share repurchases
were discussed “in conjunction” with the environmental and litigation reserves.120
The following day, on February 13, 2019, the Board met and increased the
2018 Stock Repurchase Program to permit the repurchase of up to $1 billion of the
Company’s shares. 121 The Board also announced a $0.25 per share quarterly cash
dividend. 122 At the meeting, with Defendant Newman present, the Board received
an update on a consent order related to the Fayetteville Works site. 123 The Complaint
alleges that the Board discussed “what appears to be a GAAP-based accrual for
Fayetteville,” and that the Board “separately” discussed share repurchases and
received a presentation conveying that “INVESTORS WANT CAPITAL
ALLOCATED TO THEMSELVES.” 124 The Complaint alleges that there is no
indication that the share purchases and the environmental and litigation reserves
were discussed “in conjunction” with one another at this meeting. 125 The resolutions
118
Id. ¶ 187.
119
Id.
120
Id.
121
Id. ¶ 190.
122
Id.
123
Id. ¶ 188.
124
Id. ¶ 189 (capitalization in original).
125
Id.
23
that approved the share repurchase increase and the dividends stated that the Board
believed the return of capital complied with the DGCL, though the Complaint asserts
that this belief was based solely on accounting-based reserves.126
Two months later, in April 2019, the Board announced a $0.25 quarterly cash
dividend. Specifically, on April 29, 2019, the Audit Committee met, along with
Defendants Brown, Vergnano and Newman, and received a litigation update that
discussed the environmental litigation.127 The following day, on April 30, 2019, the
Board met, with Defendant Newman and the law firm Wachtell, Lipton, Rosen &
Katz (“Wachtell”) in attendance. 128 At the meeting, the Board participated in a
“Litigation Discussion” and announced the $0.25 dividend. 129
The resolutions approving the dividend stated that the Board believed the
dividend complied with the DGCL.130 However, the Complaint asserts that the
Board relied solely on accounting-based reserves in forming this belief, and that
there is no indication that the Board quantified or considered the contingent
environmental liabilities “in connection” with the stock repurchases.131 The
following day, May 1, 2019, the Board met, along with Wachtell and Defendant
126
Id. ¶ 191.
127
Id. ¶ 201.
128
Id. ¶ 202.
129
Id. ¶¶ 202–03.
130
Id. ¶ 203.
131
Id.
24
Newman. 132 At the meeting, the Board participated in another “litigation
discussion,” with Defendant Brown noting “the sensitive nature of the items to be
discussed for the day.” 133
In total, Chemours expended approximately $1.07 billion in connection with
the 2017 and 2018 Stock Repurchase Programs and approximately $667 million in
connection with the dividend payments from July 2015 through February 10,
2021.134
6. The DuPont Complaint
In May 2019, as the environmental liabilities continued to mount, Chemours
filed a complaint against DuPont in this Court seeking to hold DuPont liable for any
amounts above the Maximums that DuPont certified in connection with the Spin-
Off (the “DuPont Complaint”). 135
Just before the Company filed the DuPont Complaint, on May 6, 2019, Larry
Robbins, a hedge fund CEO, gave a presentation at the Sohn Investment Conference
in which he discussed liabilities faced by PFAS manufacturers.136 Robbins
estimated that Chemours’s environmental liabilities were around “$4 to 6 billion,”
and he added that “[t]he liabilities are now Chemours’s. Every time you see DuPont
132
Id. ¶ 204.
133
Id.
134
Id. ¶¶ 226, 230, 241.
135
Id. § III.D.
136
Id. ¶ 211.
25
losing a suit, you should assume that that liability will stay with Chemours.”137
Although the Company publicly disputed Robbins’s statements, 138 the day after
Robbins’s presentation, on May 7, 2019, Chemours stopped the 2018 Stock
Repurchase Program. 139
A week later, on May 13, 2019, Chemours filed the DuPont Complaint, which
was verified by Defendant Newman.140 The DuPont Complaint sought “to hold
DuPont accountable for [the Maximums],” which it alleged “have proven to be
systematically and spectacularly wrong.”141 It further alleged that “if Chemours had
unlimited responsibility for the true potential maximum liabilities, it would have
been insolvent as of the time of the spin-off.” 142 Thus, the DuPont Complaint sought
a holding that DuPont, and not Chemours, was responsible for any amounts that
exceeded the Maximums. 143 The DuPont Complaint also sought, in the alternative,
the return of the $3.91 billion dividend that Chemours paid to DuPont prior to the
Spin-Off.144
137
Id. ¶ 212–13.
138
Id. ¶ 214.
139
Id. ¶ 215.
140
Id. ¶ 216.
141
Id. ¶ 217.
142
Id. ¶ 219 (emphasis added).
143
Verified First Amended Compl. ¶¶ 120–79, The Chemours Company v. DowDuPont Inc., C.A.
No. 2019-0351-SG (Dkt. No. 33) [hereinafter the “DuPont Complaint”].
144
Id. ¶¶ 180–201.
26
The instant Complaint alleges that in the DuPont Complaint, Chemours
“admitted” to $2.56 billion in liabilities that it inherited from DuPont at the time of
the Spin-Off. Specifically, the Complaint alleges that the DuPont Complaint
admitted to $335 million in liability for the Ohio MDL, $1.7 billion in liability for
New Jersey litigation, $200 million in liability for the Fayetteville Works site, $111
million in liability for benzene, and $194 in liability for PFAS, including GenX.145
The Complaint alleges that these figures, taken from the DuPont Complaint, were
Chemours’s “conservative estimates.”146
On December 18, 2019, at oral argument regarding DuPont’s motion to
dismiss, Chemours’s counsel reiterated the assertion in the DuPont Complaint that
Chemours would have been insolvent at the time of the Spin-Off if it were liable
above the Maximums:
[CHEMOURS’S COUNSEL]: The Complaint alleges
very specifically that as of the date of the spin, Chemours
was insolvent. I think [DuPont’s counsel] this morning
said that that is not the case. Paragraph 125 of the
complaint alleges that point in no uncertain terms and very
directly. But quite apart from that allegation, the whole
theory of the complaint supports the inference and we
think compels the inference that the disequilibrium at the
time of the spin created the specter of insolvency.147
145
Compl. ¶ 222.
146
Id. ¶ 223.
147
Oral Argument re Plaintiff’s Motion to Stay Arbitration and Cross-Motions to Compel
Production, Defendants’ Motion to Stay Discovery and Motion to Dismiss, and the Court’s Partial
Ruling, at 72:16–73:1, The Chemours Company v. DowDuPont Inc., C.A. No. 2019-0351-SG
(Dkt. No. 56) [hereinafter “DuPont Oral Argument Tr.”].
27
* * *
[CHEMOURS’S COUNSEL]: . . . . [The case] rests on the
allegation that Chemours was insolvent at the time of the
spin, provided that DuPont’s present interpretation of the
complete inutility of its estimated maximum liabilities is
credited. The Court was quite right in terms of
understanding what our position had been in the complaint
in terms of the cushion, in your colloquy with [DuPont’s
counsel].
THE COURT: That was my understanding, is that you
were saying that setting aside the excess over the
estimation of the environmental liabilities, there was no
cushion. Is that what you were --
[CHEMOURS’S COUNSEL]: That was our position,
Your Honor. You have that straight on. And we have
alleged that the liability maximums were undertaken to
satisfy Delaware law; that they were undertaken in a way
that can only lead to an inference of bad faith, because they
were just manifestly evidently designed to undercount the
liability hugely; and that they did, in fact, undercount the
liability hugely, as has been demonstrated; and that, in
consequence, the company was not solvent at the time it
was spun.148
According to the Complaint, Chemours “admitted” in the DuPont Complaint
that, because of the environmental liabilities, Chemours had been insolvent since the
time of the Spin-Off and therefore lacked adequate “surplus” to declare dividends or
repurchase stock.149 The Complaint alleges that the Company also lacked net profits
from which to declare dividends.150
148
Id. at 149:3–150:1.
149
Compl. § III.D.
150
Id. ¶ 243.
28
with unfiled matters. 154 Under the settlement, expenses are split 50-50 between
DuPont and Corteva, on the one hand, and Chemours on the other. 155 The settlement
provides that this 50-50 split will be for a term not to exceed 20 years or $4 billion
of qualified spending and escrow contributions, in the aggregate. 156 In addition,
DuPont, Corteva, and Chemours agreed to settle ongoing matters related to the Ohio
MDL for $83 million, with DuPont and Corteva paying $27 million each, and
Chemours paying $29 million.157
7. The Stock Trades
In addition to the stock repurchases and dividend payments, the Complaint
also challenges certain stock sales by Defendants Vergnano and Newman.
Specifically, the Complaint alleges that Defendant Vergnano sold 200,151 shares of
Chemours stock for proceeds of over $10 million, and that Defendant Newman sold
155,047 shares of Chemours stock for proceeds of over $6.8 million. 158 The
Complaint alleges that Defendants Vergnano and Newman undertook these sales
while aware that Chemours was “insolvent” or “teetering on insolvency” and that
the public was “not aware of the true extent of the Company’s environmental
liabilities.”159
154
Id. ¶ 253.
155
Id.
156
Id.
157
Id. ¶ 254.
158
Id. ¶¶ 249–50.
159
Id. ¶ 248.
30
C. Procedural History
Plaintiff Hialeah Retirement initiated this action on September 16, 2020.160
On December 17, 2020, I ordered a temporary stay of this action pending a
supplemental document production by the Defendants. 161 On February 22, 2021,
after a review of the supplemental production, Plaintiff Roberto Pinto filed a
Verified Stockholder Derivative Complaint in the action captioned Pinto v.
Vergnano, et al., C.A. No. 2021-0152-SG. 162 On February 23, 2021, I (i) ordered
the consolidation of the two actions because they presented common issues of law
and fact, (ii) appointed Hialeah Retirement as lead plaintiff and Pinto as an
additional plaintiff, (iii) appointed Bernstein Litowitz Berger & Grossmann LLP as
lead counsel, and (iv) deemed the Pinto Complaint the operative complaint.163
The Complaint brings derivative claims against the Director Defendants for
violations of 8 Del. C. §§ 160 and 174 in connection with the 2017 and 2018 Stock
Repurchase Programs (Count I); violations of 8 Del. C. §§ 170, 173, and 174 in
connection with the dividend payments (Count II); and breaches of fiduciary duty in
connection with the stock repurchases and dividend payments (Count III).164 The
Complaint also brings claims against the Officer Defendants for breach of fiduciary
160
Verified Stockholder Derivative Compl., Dkt. No. 1.
161
Order Temporarily Staying Action Pending Suppl. Produc., Dkt. No. 22.
162
See generally Compl.
163
Order Consolidation, Appointment Lead Pl. Lead Counsel, Setting Briefing Schedule, Dkt. No.
25 ¶¶ 1, 5–7, 9.
164
Compl. ¶¶ 263–76.
31
duty (Count IV) and unjust enrichment (Count V) in connection with their stock
sales.165 Finally, the Complaint brings claims in the alternative against Defendant
Vergnano (Count VI) and Defendant Newman (Count VII) for breaches of the duty
of candor to the other Director Defendants in connection with the stock repurchases
and dividend payments.166
The Defendants moved to dismiss the Complaint (the “Motion to Dismiss”)167
and filed an opening brief in support of their Motion to Dismiss on April 23, 2021.168
The Plaintiffs filed an answering brief in opposition to the Motion to Dismiss on
May 24, 2021, 169 and the Defendants filed a reply brief in further support of the
Motion to Dismiss on June 23, 2021.170 On July 19, 2021, I heard oral argument on
the Motion to Dismiss, and I considered the Motion to Dismiss submitted for
decision as of that date.
II. LEGAL STANDARDS
“‘A cardinal precept’ of Delaware law is ‘that directors, rather than
shareholders, manage the business and affairs of the corporation.’” 171 “The board’s
165
Id. ¶¶ 277–86.
166
Id. ¶¶ 287–300.
167
Defs.’ Mot. Dismiss, Dkt. No. 26.
168
Defs.’ Mem. Law Supp. Defs.’ Mot. Dismiss Verified Stockholder Derivative Compl., Dkt.
No. 26 [hereinafter “Defs.’ Opening Br.”].
169
Pls.’ Answering Br. Opp. Defs.’ Mot. Dismiss, Dkt. No. 50 [hereinafter “Pls.’ Answering Br.”].
170
Defs.’ Reply Mem. Law Further Supp. Defs.’ Mot. Dismiss Verified Stockholder Derivative
Compl., Dkt. No. 54 [hereinafter “Defs.’ Reply Br.”].
171
United Food and Commercial Workers Union and Participating Food Indus. Emp’rs Tri-State
Pension Fund v. Mark Zuckerberg et al., 2021 WL 4344361, at *6 (Del. Sept. 23, 2021) (quoting
32
authority to govern corporate affairs extends to decisions about what remedial
actions a corporation should take after being harmed, including whether the
corporation should file a lawsuit against its directors, its officers, its controller, or an
outsider.”172 In other words, a chose in action is a corporate asset like any other,
under our model subject to the control of the board of directors. “‘In a derivative
suit, a stockholder seeks to displace the board’s [decision-making] authority over a
litigation asset and assert the corporation’s claim.’”173 “Thus, ‘[b]y its very nature[,]
the derivative action’ encroaches ‘on the managerial freedom of directors’ by
seeking to deprive the board of control over a corporation’s litigation asset.”174 The
rationale for permitting derivative litigation to proceed is that the directors are
disabled from monetizing the asset, and that the litigation must proceed derivatively
or not at all.
“‘In order for a stockholder to divest the directors of their authority to control
the litigation asset and bring a derivative action on behalf of the corporation, the
stockholder must’ (1) make a demand on the company’s board of directors or
(2) show that demand would be futile.” 175 The demand requirement “is a substantive
Aronson v. Lewis, 473 A.2d 805, 811 (Del. 1984), overruled on other grounds Brehm v. Eisner,
746 A.2d 244 (Del. 2000)).
172
Id.173
Id. (quoting United Food & Commercial Workers Union v. Zuckerberg, 250 A.3d 862, 876
(Del. Ch. 2020), aff’d sub nom. Zuckerberg, 2021 WL 4344361).
174
Id. (quoting Aronson, 473 A.2d at 811).
175
Id. (quoting Lenois v. Lawal, 2017 WL 5289611, at *9 (Del. Ch. Nov. 7, 2017)).
33
requirement that ‘[e]nsure[s] that a stockholder exhausts his intracorporate
remedies,’ ‘provide[s] a safeguard against strike suits,’ and ‘assure[s] that the
stockholder affords the corporation the opportunity to address an alleged wrong
without litigation and to control any litigation which does occur.’” 176
Under Court of Chancery Rule 23.1, a shareholder seeking to assert a
derivative claim must “allege with particularity the efforts, if any, made by the
plaintiff to obtain the action the plaintiff desires from the directors or comparable
authority and the reasons for the plaintiff’s failure to obtain the action or for not
making the effort.” 177 “Rule 23.1 is not satisfied by conclusory statements or mere
notice pleading. On the other hand, the pleader is not required to plead evidence.
What the pleader must set forth are particularized factual statements that are essential
to the claim.” 178 “When considering a motion to dismiss a complaint for failing to
comply with Rule 23.1, the Court does not weigh the evidence, must accept as true
all of the complaint’s particularized and well-pleaded allegations, and must draw all
reasonable inferences in the plaintiff’s favor.” 179
176
Id. (quoting Lenois, 2017 WL 5289611, at *9).
177
Ct. Ch. R. 23.1.
178
Brehm, 746 A.2d at 254.
179
Zuckerberg, 2021 WL 4344361, at *7.
34
III. ANALYSIS
The Plaintiffs did not make a demand on the Company’s Board to institute
this action. 180 Therefore, to survive a motion to dismiss, the Plaintiffs must plead
with particularity that demand would be futile. That inquiry is satisfied if, given the
truth of the particularized facts alleged and the reasonable inferences therefrom, the
complaint creates a reasonable doubt that a majority of the Board is able to “bring
[its] business judgment to bear” on behalf of the Company to assess the substance
of the demand.181 To determine whether demand would be futile, this Court asks the
following three questions on a director-by-director basis:
(i) whether the director received a material personal
benefit from the alleged misconduct that is the subject of
the litigation demand;
(ii) whether the director faces a substantial likelihood of
liability on any of the claims that would be the subject of
the litigation demand; and
(iii) whether the director lacks independence from
someone who received a material personal benefit from
the alleged misconduct that would be the subject of the
litigation demand or who would face a substantial
likelihood of liability on any of the claims that are the
subject of the litigation demand.182
180
Compl. ¶ 259.
181
Ryan v. Armstrong, 2017 WL 2062902, at *2 (Del. Ch. May 15, 2017), aff’d, 176 A.3d 1274(Del. 2017).
182
Zuckerberg, 2021 WL 4344361, at *17.
35
If the court determines that, for at least half of the members of the demand board,
the answer to any of these questions is, “yes,” then demand is excused as futile. 183
The Plaintiffs here do not attempt to meet the requirements of (i) or (iii)
above.184 Instead, the Plaintiffs contend that seven of the nine Chemours’s directors
who have been on the Board since the Spin-Off face a substantial likelihood of
liability for the alleged statutory violations and breaches of fiduciary duty relating
to the stock repurchases, dividend payments, and stock sales.185
Chemours’s certificate of incorporation contains an exculpatory provision, as
authorized by 8 Del. C. § 102(b)(7), which provides as follows:
To the fullest extent permitted by the DGCL, as it now
exists and as it may hereafter be amended, no director of
the Corporation shall be personally liable to the
Corporation or any of its stockholders for monetary
damages for breach of a fiduciary duty as a director, except
for liability of a director (a) for any breach of the director’s
duty of loyalty to the Corporation or its stockholders,
(b) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law,
(c) under Section 174 of the DGCL, or (d) for any
transaction from which the director derived an improper
personal benefit . . . . 186
Therefore, the Plaintiffs must plead with particularity that a majority of the
demand Board faces a substantial likelihood of liability for a non-exculpated claim.
183
Id.
184
See Compl. § V.
185
See id.
186
Friedlander Decl., Ex. 2 § 7.01 (emphasis added).
36
For the reasons below, I find that the Plaintiffs have failed to establish that a majority
of Chemours’s directors face a substantial likelihood of liability with respect to any
of the Plaintiffs’ claims.
A. Demand Is Not Excused as to the Plaintiffs’ Statutory Claims (Counts I
and II)
Counts I and II of the Complaint seek to hold the Director Defendants liable
under 8 Del. C. § 174 for the stock repurchases and dividend payments. Claims
under Section 174 are not exculpated under the exculpatory provision in Chemours’s
certificate of incorporation. 187
Section 174 provides that “[i]n case of any wilful or negligent violation of
§ 160 or § 173 of this title, the directors under whose administration the same may
happen shall be jointly and severally liable . . . to the corporation, and to its creditors
in the event of its dissolution or insolvency, to the full amount of the dividend
unlawfully paid, or to the full amount unlawfully paid for the purchase or redemption
of the corporation’s stock . . . .” 188 In other words, in the event of a willful or
negligent violation by the entity of Section 160 or Section 173 (which set out the
requirements for a corporation to repurchase stock and pay dividends), Section 174
by its explicit terms imposes liability upon the directors in place at the time of the
187
See id. Nor is exculpation for such a claim permitted by Delaware law.
See 8 Del. C. § 102(b)(7)(iii).
188
8 Del. C. § 174(a).
37
violation, in the amount so distributed, running to the corporation and, if applicable,
its creditors. 189 This rigorous liability scheme is tempered by Section 172 of the
DGCL, however. 190 In the event of a violation, directors are “fully protected” under
Section 172 from liability if they rely “in good faith” upon the corporation’s records,
officers and employees, committees of the board, or experts, in determining that the
corporation has adequate funds to repurchase stock or pay dividends. 191 In other
words, as I read the statute,192 directors generally remain liable for a violation of
Sections 160 or 173 arising from their own negligence or bad faith.
189
Id. Section 174 further provides that even directors who were “absent when the same was
done” may be liable unless they “caus[e] [their] dissent to be entered on the books containing the
minutes of the proceedings of the directors at the time the same was done, or immediately after
such director[s] ha[ve] notice of the same.” Id.
190
8 Del. C. § 172.
191
Id.
192
At oral argument, the Plaintiff’s counsel aptly referred to this action and its underlying theory
as sui generis. See Oral Argument on Defs.’ Mot. to Dismiss, Dkt. No. 59, at 90:7. So far as I am
aware, this is the first time a court had occasion to consider an attempt by a stockholder to impose
liability on the corporate behalf against directors for a violation of Sections 160 or 173, as
vindicated by Section 174. See, e.g., JPMorgan Chase Bank, N.A. v. Ballard, 213 A.3d 1211,
1216 (Del. Ch.) (Section 174 claim brought by creditor); Quadrant Structured Prod. Co. v. Vertin,
102 A.3d 155, 201 (Del. Ch. 2014) (Section 174 claim brought by noteholder); In re Verizon Ins.
Coverage Appeals, 222 A.3d 566, 576 (Del. 2019) (Section 174 claim brought by trustee);
Johnston v. Wolfe, 1983 WL 21437, at *2 (Del. Ch. Feb. 24, 1983) (Section 174 claim brought by
purported creditors), aff’d sub nom. Johnston v. Wolf, 487 A.2d 1132 (Del. 1985); In re Sheffield
Steel Corp., 320 B.R. 405, 410 (Bankr. N.D. Okla. 2004) (Section 174 claim brought by
corporation as debtor-in-possession in bankruptcy adversary proceeding); In re Magnesium Corp.
of Am., 399 B.R. 722, 776–77 (Bankr. S.D.N.Y. 2009) (Section 174 claim brought by Chapter 7
bankruptcy trustee); In re Tribune Co. Fraudulent Conv. Litig., 2018 WL 6329139, at *11–12
(S.D.N.Y. Nov. 30, 2018) (Section 174 action brought by litigation trustee on behalf of creditors),
aff’d, 10 F.4th 147 (2d Cir. 2021); Fotta v. Morgan, 2016 WL 775032, at *4 (Del. Ch. Feb. 29,
2016) (derivative claim sought “declaratory judgment that the stock issued as the dividend is void
ab initio,” not director liability under Section 174). Although a derivative Section 174 action was
brought in Feldman v. Cutaia, the claim was extinguished by a merger under the continuous
ownership rule, and thus the Court did not reach the merits. 956 A.2d 644, 651, 660–63 (Del. Ch.
2007), aff’d, 951 A.2d 727 (Del. 2008).
38
Sections 160 and 173, in turn, impose limits on a corporation’s ability to
repurchase stock and issue dividends, respectively. As relevant to this action,
Section 160 provides that “no corporation shall . . . [p]urchase or redeem its own
shares of capital stock for cash or other property when the capital of the corporation
is impaired or when such purchase or redemption would cause any impairment of
the capital of the corporation.” 193 “A repurchase impairs capital if the funds used in
the repurchase exceed the amount of the corporation’s ‘surplus.’” 194
Section 173, through Section 170, provides for a similar requirement with
respect to dividends, albeit with more wiggle room. Specifically, Section 173 states
that “[n]o corporation shall pay dividends except in accordance with this chapter.”195
Section 170 states that “[t]he directors of every corporation . . . may declare and pay
dividends upon the shares of its capital stock either: (1) Out of its surplus . . . ; or
(2) In case there shall be no such surplus, out of its net profits for the fiscal year in
which the dividend is declared and/or the preceding fiscal year.” 196
In short, Sections 160, 170 and 173 preclude a corporation from issuing
dividends or repurchasing stock in an amount that exceeds “surplus,” except that
dividends may also be issued from the corporation’s net profits of the fiscal year in
193
8 Del. C. § 160(a)(1).
194
Klang, 702 A.2d at 153.
195
8 Del. C. § 173.
196
8 Del. C. § 170(a)(1)–(2).
39
which the dividend is declared or the preceding fiscal year. “Surplus” is “defined
by 8 Del. C. § 154 to mean the excess of net assets over the par value of the
corporation’s issued stock.”197 Because Chemours’s issued stock has a nominal par
value of $0.01 per share, the surplus calculations at issue here effectively boil down
to a calculation of Chemours’s net assets.198 Net assets is defined by 8 Del. C. § 154
to mean “the amount by which total assets exceed total liabilities.” 199
The Plaintiffs contend that, because of the potential environmental liabilities,
Chemours’s net liabilities exceeded its net assets, such that the stock repurchases
and dividend payments violated Sections 160, 170, and 173.200 The Plaintiffs further
contend that the Director Defendants themselves were at least negligent by relying
on GAAP-based accounting reserves to calculate surplus, which the Plaintiffs argue
exclude contingent environmental liabilities. 201
As explained below, I find that the Complaint does not allege with
particularity that the stock repurchases and dividend payments violated Sections
160, 170 or 173, or that the Director Defendants were negligent under Section 174.
197
Klang, 702 A.2d at 153.
198
See Pls.’ Answering Br. at 37 (“Thus, if the fair value of a company’s liabilities . . . exceed the
fair value of its assets, its capital is statutorily impaired.”); Defs.’ Opening Br. at 28 n. 10 (“Like
many companies, the par value of Chemours’s stock is set at the nominal amount of $0.01 per
share.”).
199
8 Del. C. § 154.
200
Pls.’ Answering Br. at 37–38.
201
Id. at 48–52.
40
I also find that the Director Defendants are “fully protected” from liability under
Section 172.
1. The Complaint Concedes that Most of the Dividend Payments
Complied with Delaware Law
As an initial matter, the Director Defendants do not face a substantial
likelihood of liability with respect to the dividends paid in 2015, 2017, 2018, 2019
or 2020, and $7,000,000 of the dividends paid in 2016, because the Complaint
concedes that those dividends complied with 8 Del. C. § 170. Specifically, Section
170 provides that, “[i]n case there shall be no such surplus” from which to declare
dividends, “[t]he directors of every corporation . . . may declare and pay
dividends . . . out of its net profits for the fiscal year in which the dividend is declared
and/or the preceding fiscal year.”202
The Complaint concedes that Chemours’s net profits exceeded its dividend
payments in the 2017, 2018 and 2020 fiscal years.203 The Complaint further
concedes that Chemours had sufficient net profits in 2014 and 2018 from which to
pay its 2015 and 2019 dividend payments.204 Thus, for the fiscal years 2015, 2017,
2018, 2019, and 2020, the Company complied with Section 170 by paying “out of
its net profits for the fiscal year in which the dividend is declared and/or the
202
8 Del. C. § 170(a)(2).
203
Compl. ¶ 243.
204
Id. ¶ 243.
41
preceding fiscal year.” 205 The Plaintiffs do not appear to dispute this point, and
contends only that the “Defendants recognize, as they must, that there were other
points in time that the Company lacked sufficient net profits to pay dividends.”206
Accordingly, because the Complaint does not allege a violation of Section 170 in
connection with the 2015, 2017, 2018, 2019 or 2020 dividend payments, the Director
Defendants do not face a substantial likelihood of liability, and demand is not
excused, with respect to those dividends.
With respect to the dividends issued in the 2016 fiscal year, the Complaint
alleges that Chemours issued $16,345,494 in dividends, but recorded only
$7,000,000 in net profits, with negative net profits in the preceding year.207 In other
words, the Complaint concedes that at least $7,000,000 of the dividend payments
from the 2016 fiscal year complied with Section 170, because they were paid out of
net profits. Accordingly, with respect to that portion of the 2016 dividend payments,
the Director Defendants do not face a substantial likelihood of liability, and demand
is not excused.
205
8 Del. C. § 170. See also Defs.’ Opening Br. at 29 n.9 (“[T]he Complaint’s own allegations
dictate that the Company’s net profits defeat liability for all of the Company’s dividends in 2015,
2017, 2018, 2019, and 2020.”).
206
See Pls.’ Answering Br. at 38 n.7.
207
Compl. ¶ 243.
42
2. The Complaint Does Not Plead that The Board’s Surplus
Determinations Violated Delaware Law
The Plaintiffs’ remaining statutory claims concern the 2017 and 2018 Stock
Repurchase Programs and the $9,345,494 in dividends issued in 2016 that exceeded
Chemours’s net profits in that year and the preceding year. The Plaintiffs contend
that these capital returns violated Sections 160 and 170 because the Company
allegedly did not have “surplus” from which to issue dividends or repurchase
stock.208
The parties disagree on the standard of review that the Court should apply to
a Board’s surplus determination. The Plaintiffs contend that, under Section 174, the
standard is simple negligence. 209 The Defendants, in contrast, argue that the Section
174 negligence standard is only implicated “if, in fact, a board failed to calculate
surplus appropriately.” 210 The Defendants further argue that “bad faith or fraud,”
not negligence, is the standard to show an improper surplus calculation.211
Both the Plaintiffs and the Defendants rely largely on the same case to support
their arguments: Klang v. Smith’s Food & Drug Centers, Inc. 212 In Klang, this Court
declined to rescind a stock repurchase, finding that the board’s surplus calculation
208
Pls.’ Answering Br. at 37–38.
209
See id. at 43 (“The DGCL’s negligence standard firmly applies.”).
210
See Defs.’ Opening Br. at 29.
211
See id.at 29 (citing Klang, 702 A.2d at 156).
212
702 A.2d 150. See also Klang v. Smith’s Food & Drug Centers, Inc., 1997 WL 257463 (Del.
Ch. May 13, 1997), aff’d, 702 A.2d 150.
43
did not violate Section 160.213 The Defendants argue that, under Klang, this Court
should defer to the Board’s surplus calculation “unless [the Plaintiffs] can show that
the directors ‘failed to fulfill their duty to evaluate the assets on the basis of
acceptable data and by standards which they are entitled to believe reasonably reflect
present values.’”214 Thus, the Defendants argue that Klang requires the Plaintiffs to
plead particularized facts showing “bad faith or fraud on the part of the board,” or
“actual or constructive fraud.”215
The Plaintiffs take a contrary view. The Plaintiffs argue that Klang does not
mandate a “bad faith or fraud” standard, but rather, it says that the Board’s surplus
determination can only be given “reasonable latitude” if the Board (i) “evaluate[s]
assets and liabilities in good faith,” (ii) “on the basis of acceptable data,” (iii) “by
methods that they reasonably believe reflect present values,” and (iv) “arrive[s] at a
determination of the surplus that is not so far off the mark as to constitute actual or
constructive fraud.”216
213
1997 WL 257463, at *2–5.
214
Defs.’ Opening Br. at 29 (quoting Klang, 702 A.2d at 155–56). The Defendants also cite to SV
Inv. Partners, LLC v. ThoughtWorks, Inc., for the same proposition. 7 A.3d 973, 988 (Del. Ch.
2010), aff’d, 37 A.3d 205 (Del. 2011).
215
Defs.’ Opening Br. at 30 (quoting Klang, 702 A.2d at 156).
216
Pls.’ Answering Br. at 39 (quoting Klang, 702 A.2d at 152).
44
Although Klang did not involve an action seeking to hold directors liable to
the corporation for negligence under Section 174,217 it does provide guidance as to
how this Court should evaluate a Board’s surplus determination under Sections 160
and 170. As a general proposition, the DGCL “contains no prescriptions as to the
form or manner of preparing and maintaining books of account and financial
statements nor of the manner in which the corporation values its assets for such
purposes.”218 As a result, “[t]he determination of the amount that is to be ‘capital’
and the amount that is to be ‘surplus’ is one that essentially is within the control and
discretion of the board of directors.”219
Likely for this reason, the Klang Court observed that Section 154, which
defines surplus, “does not require any particular method of calculating surplus, but
simply prescribes factors that any such calculation must include.” 220 Those factors
are the corporation’s “total assets” and “total liabilities.” 221 Thus, as the Klang Court
explained, “compliance with Section 160”—and, by extension, Section 170, which
requires the same surplus determination—is satisfied “by methods that fully take
217
In Klang, the plaintiff sought “rescission of a series of transactions including a . . . stock
repurchase,” on the basis that the corporation lacked surplus to repurchase stock. 1997 WL
257463, at *1. Thus, the Court had no reason to consider Section 174.
218
Balotti and Finkelstein, The Delaware Law of Corporations and Business Organizations § 5.22
(4th ed., Dec. 2020 update).
219
Id. See also In re Color Tile, Inc., 2000 WL 152129, at *3 (D. Del. Feb. 9, 2000) (explaining
in dicta that “[t]he directors . . . have almost unfettered discretion in defining the extent of the
corporation’s surplus”).
220
702 A.2d at 155.
221
8 Del. C. § 154.
45
into account the assets and liabilities of the corporation.” 222 Therefore, under Klang,
this Court will defer to the Board’s surplus calculation “so long as [the directors]
evaluate assets and liabilities in good faith, on the basis of acceptable data, by
methods that they reasonably believe reflect present values, and arrive at a
determination of the surplus that is not so far off the mark as to constitute actual or
constructive fraud.”223 The Klang Court’s ruling—according deference to directors’
“reasonable belief” as to corporate “present values”—is consistent with the Section
174 standard that directors are liable in case of their bad faith or negligent actions
regarding surplus. If the Complaint does not allege with particularity that the
Board’s surplus determinations fell short of the criteria outlined in Klang, the
determinations comply with Sections 160, 170, and 173. And if the Board’s surplus
determinations comply with those sections, there is no “willful or negligent”
violation for which to hold the Director Defendants liable.
The Plaintiffs argue that the Board’s alleged reliance on GAAP-based
accounting reserves in connection with its surplus determinations was unreasonable
under the circumstances known to the directors, in that it failed to “fully take into
account the assets and liabilities of the corporation.”224 Specifically, the Plaintiffs
argue that because GAAP “does not require recognition of liabilities unless they are
222
702 A.2d at 155.
223
Id.224
See Pls.’ Answering Br. at 43 (quoting Klang, 702 A.2d at 155).
46
both ‘probable’ and ‘reasonably estimable,’” any GAAP-based calculation may
exclude the significant contingent environmental liabilities.225 Thus, the Plaintiffs
argue that the Director Defendants were required under Klang to revalue the
Company’s assets and liabilities to fully account for the contingent environmental
liabilities. 226 According to the Plaintiffs, the inclusion of those contingent
environmental liabilities—which the Plaintiffs say must not include any discount for
the probability of success—would reveal that “such liabilities greatly exceed GAAP
reserves.”227
The Complaint does not allege particularized facts showing that by relying on
GAAP-based accounting reserves, the Director Defendants failed to “fully take into
account the assets and liabilities of the corporation.”228 Generally, “Delaware
corporations . . . follow generally accepted accounting principles” (i.e., GAAP)
when “preparing and maintaining books of account and financial statements” and
“valu[ing] its assets for such purposes.”229 The Complaint does not allege with
particularity why the Board was required to depart from this “generally accepted”
approach here.
225
See id. at 40–41.
226
See id. at 42–43.
227
See id. at 42.
228
See id. at 43 (quoting Klang, 702 A.2d at 155).
229
Balotti and Finkelstein, The Delaware Law of Corporations and Business Organizations § 5.22
(4th ed., Dec. 2020 update).
47
To begin, the Complaint does not allege particularized facts suggesting that,
at the time the Board approved the 2017 and 2018 Stock Repurchases and the 2016
dividend payments, the contingent environmental liabilities were neither “probable”
nor “reasonably estimable,” such that they were in fact excluded from the GAAP
accounting reserves. At most, the Plaintiffs allege that the DuPont Complaint
admitted that, “as of December 31, 2014,” GAAP accounting reserves excluded
liabilities that were not “viewed as ‘probable’” and “also excluded liabilities that
were regarded as probable at the time, but for which DuPont had not yet made an
estimate.”230
But this admission says nothing about whether the contingent environmental
liabilities remained improbable and not yet estimated at the time the Board approved
the 2017 and 2018 Stock Repurchase Programs, years later, on November 30, 2017,
August 1, 2018, and February 13, 2019,231 or when the Board approved the 2016
dividend payments between April 2016 and November 2016.232 Indeed, the
Complaint includes pages of allegations detailing the developments in the
environmental litigation after December 31, 2014, including the settlement of the
Ohio MDL in February 2017 and the bellwether cases that DuPont lost in mid-
230
Compl. ¶ 70.
231
See id. ¶¶ 229–30.
232
See id. ¶ 241.
48
2016. 233 Without more, it is not reasonable to infer that, for years after December 31,
2014, the contingent environmental liabilities continued to be unrecognized under
the accounting methods used by Chemours.
Nor does the Complaint plead with particularity that, even if the GAAP-based
accounting reserves excluded the contingent environmental liabilities as improbable
and not reasonably estimable, their inclusion would have rendered Chemours
without surplus. To arrive at their conclusion that the contingent environmental
liabilities rendered Chemours insolvent, the Plaintiffs compile a list of figures
asserted by Chemours in the DuPont Complaint, which the Plaintiffs label
“Company Conservative Estimate[s],” that add up to $2.56 billion. 234 The Plaintiffs
argue that, by asserting these figures in the DuPont Complaint, the Company
“admitted” that it was responsible for these liabilities. 235 The Plaintiffs then contend
that the Board was precluded from discounting those supposed estimates to their
“present value” in connection with their surplus determination.236
These arguments fail for several reasons. First, most of the figures from the
DuPont Complaint that the Plaintiffs rely on to arrive at their $2.56 billion
calculation do not actually represent the Company’s “conservative estimates” of
233
See e.g., id. ¶¶ 95–100, 104–18.
234
See id. ¶ 222.
235
Id.
236
See Pls.’ Answering Br. at 42–43.
49
Chemours’s contingent environmental liabilities. For instance, the Complaint
attributes a $335 million figure to the Ohio MDL, 237 which appears to be derived
from the $670 million settlement that was “split evenly between DuPont and
Chemours.”238 But as the Complaint admits, that settlement occurred in February
2017—before the Board approved the 2017 and 2018 Stock Repurchase
Programs. 239 The $335 million figure thus was not “contingent” at the time the
Board approved the stock repurchases (let alone “improbable” or “not estimated”
such that it would be excluded from GAAP).
Likewise, the Plaintiffs claim that the DuPont Complaint admitted $194
million in PFAS liabilities.240 But the DuPont Complaint actually alleged that the
$194 million figure was a “catch-all” Maximum that “included everything from
PFAS liability to commercial litigation.”241 And the figures that the Plaintiffs say
the DuPont Complaint ascribed to the four New Jersey sites, the Chambers Works
site, and benzene liability are actually estimates made by DuPont or demands from
the claimants themselves, not estimates made by Chemours.242 Indeed, the only
237
Compl. ¶ 222.
238
Id. ¶ 98.
239
Id.
240
Id. ¶ 222.
241
DuPont Complaint ¶ 8. See also id. ¶ 110 (“[DuPont] certified a catch-all [Maximum] of $194
million for all other ‘General Litigation . . . to Perpetuity,’ which Houlihan Lokey reflected as
including everything not separately valued—from PFAS liability to commercial litigation.”).
242
See id. ¶ 106 (“[A] New Jersey municipality has brought suit against DuPont seeking over $1
billion to address alleged clean-up costs” for Chambers Works.); id. ¶¶ 8, 108 (“[I]n 2018,
[DuPont] provided Chemours with a more comprehensive study valuing the potential maximum
50
figure the Plaintiffs cite that actually appears to be an estimate by Chemours was the
$200 million for remediation of Fayetteville Works, 243 as the DuPont Complaint
alleged that “the cost to Chemours of implementing the consent order will be more
than $200 million.”244 Again, there is no indication that this amount was excluded
under GAAP accounting at the time the stock repurchase and dividend decisions
were made.
Significantly, moreover, the DuPont Complaint did not “admit,” as the
Plaintiffs contend, that Chemours was on the hook for any of these purported liability
estimates. Instead, the DuPont Complaint alleged that “if Chemours had unlimited
responsibility for the true potential maximum liabilities, it would have been insolvent
as of the time of the spin-off.”245 In other words, the DuPont Complaint was simply
seeking to enforce DuPont’s putative liability for amounts that exceeded the
Maximums DuPont certified in the Spin-Off; it was not admitting Chemours’s
liability for those amounts. The statements made by Chemours’s counsel at the
December 18, 2019 oral argument are not to the contrary. There, Chemours’s
counsel reiterated that Chemours would have been insolvent at the time of the Spin-
Off if it was responsible for amounts beyond the Maximums: “provided that
costs at over $111 million” for benzene.); id. ¶ 101 (“In 2018, in connection with the DowDuPont
spin-off, DuPont revised its liability estimate upward to approximately $620 million” for New
Jersey liabilities.).
243
Compl. ¶ 222.
244
DuPont Complaint ¶ 6.
245
See Compl. ¶ 219.
51
DuPont’s present interpretation of the complete inutility of its estimated maximum
liabilities is credited,” “Chemours was insolvent at the time of the [Spin-Off].”246
Furthermore, the Plaintiffs are incorrect as a matter of law that “contingent
liabilities should not be discounted to present value.” 247 In support of this argument,
the Plaintiffs invoke Boesky v. CX Partners, L.P., a case involving the liquidation of
a Delaware limited partnership.248 Boesky is not controlling, because it did not
involve a surplus determination under Sections 160 and 170, nor did it involve a
dividend, a stock repurchase, or even a corporation.249 But it also does not support
the Plaintiffs’ position. In Boesky, this Court declined to defer to the business
judgment of a liquidating trustee’s determination that the partnership had adequate
liability reserves before making partnership distributions.250 In dicta, the Court
discussed whether, in that context, it was appropriate to discount contingent claims,
noting that “discount[ing] the claim by a probability of its success and . . . reserv[ing]
only the discounted value might work” with “a sufficiently large number of similar
claims so that statistical techniques might apply,” but “[w]here . . . there are few
claims or each is quite different, such a technique obviously raises a danger . . .” to
residual claimants who would otherwise lack recourse.251 The Court ultimately
246
See DuPont Oral Argument Tr. at 149:3–150:1 (emphasis added).
247
Pls.’ Answering Br. at 42.
248
1988 WL 42250, at *1 (Del. Ch. Apr. 28, 1988).
249
Id.250
Id. at *16.
251
Id.
52
declined to “address the question whether discounting is appropriate.”252 The
Plaintiffs cite no other support for the proposition that contingent claims cannot be
discounted. To the contrary, under Klang, Sections 160 and 170 only require a
valuation that “‘reasonably reflect[s] present values.’”253 Such a valuation would
necessarily include a probability component.
Finally, even if the Complaint did adequately plead that the Company lacked
surplus, the Complaint does not allege with particularity that a majority of the
demand Board did not “reasonably believe” in good faith that the GAAP-based
accounting reserves “reflect present values.” 254 The Plaintiffs argue that the Director
Defendants were “inundated with information that the Company’s liabilities would
take it to—or beyond—the precipice of solvency,” such that the Director Defendants
were negligent in their reliance on GAAP.255 Namely, the Plaintiffs contend that
two of the Director Defendants, Brown and Crawford, who were former DuPont
directors, “knew that DuPont wanted to shed its Performance Chemicals division in
order to rid itself of massive environmental liabilities,” and that a third Director
Defendant, Vergnano, “ran the Performance Chemicals division for years prior to
the Spin-Off and was intimately involved in the business.”256 The Plaintiffs also
252
Id. at *17.
253
702 A.2d at 155 (quoting Morris v. Standard Gas & Elec. Co., 63 A.2d 577, 582 (1949)).
254
Id.255
See Pls.’ Answering Br. at 40–41.
256
See id. at 40.
53
note that the Director Defendants “received regular, quarterly updates on actual and
potential environmental litigation,” and received an “Enterprise Risk Management”
presentation stating that “Legacy/Future Environmental-Operational Sustainability”
was the Company’s number one risk.257 Finally, the Plaintiffs note that, following
the Spin-Off, the Director Defendants sought individual indemnification agreements
related to their Chemours Board service. 258 Per the Plaintiffs, the latter fact
demonstrates a fear of liability engendered by the directors’ knowledge of
Chemours’s insolvency. 259 Based on these allegations, the Plaintiffs argue that it
was “unreasonable” for the Director Defendants to rely on GAAP metrics.
Even under the negligence standard that the Plaintiffs urge, that is not enough
to establish that a majority of the demand Board faces a substantial likelihood of
liability. At most, the Plaintiffs have alleged that three of the nine members of the
demand Board—Directors Brown, Crawford and Vergnano—had knowledge of the
environmental liabilities from their time at DuPont prior to the Spin-Off, and that
the Director Defendants were aware of and regularly received updates on the
environmental liabilities. It is not reasonable to infer, based on those allegations,
that a majority of the Director Defendants “knew or should have known” that GAAP
257
See id. at 40–41, 50.
258
See id. at 40. The Plaintiffs also note that Defendant Newman “refused to certify the accuracy
of the [Maximums] in connection with the Spin-Off.” Id. Defendant Newman is not, however, a
Director Defendant, nor is he a member of the demand Board.
259
See id.
54
understated those liabilities, such that their reliance on GAAP was unreasonable.
Nor does the fact that the Director Defendants approved indemnification agreements
related to their Board service support a reasonable inference of negligence or bad
faith. Director indemnification exists “to encourage capable [people] to serve as
corporate directors, secure in the knowledge that expenses incurred by them in
upholding their honesty and integrity as directors will be borne by the corporation
they serve.”260 The Plaintiffs’ bare conclusion that the Director Defendants sought
indemnification agreements “out of fear that Chemours was insolvent”261 is
speculation that is not supported by any particularized allegations.
At bottom, the Complaint alleges no particularized facts undermining the
Board’s reliance on GAAP-based accounting reserves in connection with its
determinations that the stock repurchases and dividend payments complied with the
DGCL. The Director Defendants therefore do not face a substantial likelihood of
liability under Section 174 for violations of Section 160, 170 or 173.
3. The Director Defendants are “Fully Protected” Under Section 172
Beyond the Complaint’s failure to allege a violation of Sections 160, 170, 173,
or 174, the Director Defendants also do not face a substantial likelihood of liability
260
Stifel Fin. Corp. v. Cochran, 809 A.2d 555, 561 (Del. 2002).
261
See Pls.’ Answering Br. at 40.
55
because they are “fully protected” under 8 Del. C. § 172. Section 172 provides as
follows:
A member of the board of directors . . . shall be fully
protected in relying in good faith upon the records of the
corporation and upon such information, opinions, reports
or statements presented to the corporation by any of its
officers or employees, or committees of the board of
directors, or by any other person as to matters the director
reasonably believes are within such other person’s
professional or expert competence and who has been
selected with reasonable care by or on behalf of the
corporation, as to the value and amount of the assets,
liabilities and/or net profits of the corporation or any other
facts pertinent to the existence and amount of surplus or
other funds from which dividends might properly be
declared and paid, or with which the corporation’s stock
might properly be purchased or redeemed. 262
The Plaintiffs argue that Section 172 is an affirmative defense that cannot be
considered at the pleading stage. In support of this argument, the Plaintiffs cite
Manzo v. Rite Aid Corp., in which this Court declined to apply the defense of good
faith reliance on the reports of corporate advisors and officers under
8 Del. C. § 141(e) at the pleading stage.263 But in Manzo, “the complaint d[id] not
262
8 Del. C. § 172.
263
2002 WL 31926606, at *3 n.7 (Del. Ch. Dec. 19, 2002), aff’d, 825 A.2d 239 (Del. 2003).
Although Manzo concerned 8 Del. C. § 141(e), not Section 172, the statutes are nearly identical.
See 8 Del. C. § 141(e) (“A member of the board of directors, or a member of any committee
designated by the board of directors, shall, in the performance of such member’s duties, be fully
protected in relying in good faith upon the records of the corporation and upon such information,
opinions, reports or statements presented to the corporation by any of the corporation’s officers or
employees, or committees of the board of directors, or by any other person as to matters the
member reasonably believes are within such other person’s professional or expert competence and
who has been selected with reasonable care by or on behalf of the corporation.”). See also Klang,
702 A.2d at 156 n.12 (comparing Section 172 and Section 141(e)).
56
include allegations regarding the reports of experts.” 264 In contrast, in Brehm v.
Eisner, the Supreme Court of Delaware applied the good faith reliance defense under
8 Del. C. § 141(e) at the pleading stage where “[t]he [c]omplaint . . . admit[ed] that
the directors were advised by . . . an expert and that they relied on his expertise.”265
Accordingly, Section 172, like Section 141(e), is available as a pleading-stage
defense if it is clear from the allegations of the Complaint and the documents
incorporated by reference therein.266
The Plaintiffs argue that the Complaint does not demonstrate that the Director
Defendants ever reviewed or were advised as to the Company’s “capital” or
“surplus.”267 The Complaint admits, however, that the Board concluded, at every
meeting at which it declared a dividend or approved the stock repurchase programs,
that the capital returns complied with Delaware law. 268 The Complaint further
admits that the Board was advised that “return of capital strategies should be
evaluated in light of liquidity and credit agreement constraints from any potential
settlement of contingent liabilities,” 269 and that the Board and Audit Committee
discussed the legal and environmental reserves and received regular presentations
264
2002 WL 31926606, at *3 n.7.
265
Brehm, 746 A.2d at 261.
266
See id. Cf. Malpiede v. Townson, 780 A.2d 1075, 1094 (Del. 2001) (applying Section 102(b)(7)
defense at pleading stage).
267
Pls.’ Answering Br. at 44.
268
See Compl. ¶¶ 126, 146, 162, 171, 178, 191, 203.
269
Id. ¶ 129.
57
from management on the environmental liabilities, including during the meetings at
which the Board declared dividends and approved the repurchase programs.270
Finally, the Complaint admits that the first time the Board met to discuss dividends,
it received a presentation from its financial advisor detailing the statutory
requirements under Delaware law, and that the Board received presentations from
two different financial advisors before it proceeded with the stock repurchases.271 In
short, the Complaint itself establishes that the Board considered whether the capital
returns complied with Delaware law, that it did so after consulting with the
Company’s management and financial advisors, and that it did so after receiving
presentations on the environmental liabilities.
The Plaintiffs next argue that, even to the extent the Director Defendants were
advised that the stock repurchases and dividend payments complied with Delaware
law, the Board merely “blindly rel[ied] on reports by the Company’s officers or
advisors that omit[ted] the consideration and analysis of known, material risks,” and
that the Board should have instead “ask[ed] for a quantification of ‘capital’ and
‘surplus,’ in light of the growing environmental liabilities.”272 But the Court in
270
Id. ¶¶ 132, 138–41, 144–47, 153–54, 156, 160–62, 164–71, 174–78, 180, 187–91, 201–04.
271
See id. ¶¶ 126, 141.
272
Pls.’ Answering Br. at 44.
58
Klang held that this sort of “facts and figures balancing of assets and liabilities” is
not required in a surplus determination. 273
The Plaintiffs cite two cases in support of their argument that the Board was
“duty bound” to second guess the GAAP-based legal and environmental reserves
provided by the Company’s management in calculating surplus. I find neither
cogent. In Smith v. Van Gorkom, the board of directors approved a company sale at
a “hastily call[ed] . . . meeting without prior notice of its subject matter,” “without
any prior consideration of the issue or necessity therefor,” during which the directors
“had before [them] nothing more than [a conflicted executive’s] statement of his
understanding of the substance of an agreement which he admittedly had never read,
nor which any member of the Board had ever seen.”274 And in Cornell v. Seddinger,
a Pennsylvania case from 1912, the directors relied on a “method of accounting [that]
was entirely wrong,” and the “minutes show[ed] that . . . there was a shortage of
working capital, and the directors were considering the necessity of borrowing
money, both upon notes and by mortgaging the real estate.”275 In contrast, as
discussed above, the Board here received regular updates on the environmental
litigation and the Company’s legal and environmental reserves, which were
273
Klang, 702 A.2d at 155.
274
488 A.2d 858, 874–75 (Del. 1985), overruled on other grounds Gantler v. Stephens, 965 A.2d
695 (Del. 2009).
275
85 A. 446, 448 (1912).
59
calculated in accordance with “generally accepted accounting principles,” including
during the meetings at which the dividends and stock repurchases were approved.
In sum, the Complaint establishes that the Director Defendants are “fully
protected” by Section 172 because they relied “in good faith upon the records of the
[Company] and upon” the Company’s officers and financial advisors.276 For this
reason, and because, as discussed above, the Complaint does not plead a “willful or
negligent” violation of Sections 160, 170, 173, the Director Defendants do not face
a substantial likelihood of liability with respect to Counts I and II.
B. Demand Is Not Excused as to the Plaintiffs’ Breach of Fiduciary Duty
Claim (Count III)
In the alternative, the Complaint brings a claim for breach of fiduciary duty in
connection with the stock repurchases and dividend payments. Specifically, the
Complaint alleges that, “even if Chemours did not lack sufficient ‘capital,’ ‘surplus,’
and/or ‘net profits’ at the time of each of the stock repurchases and the dividends,”
the Director Defendants breached their fiduciary duties by authorizing the capital
returns “when they knew that the Company faced a serious risk of insolvency.” 277
The Company’s certificate of incorporation exculpates members of the Board
for breaches of fiduciary duty except bad faith.278 Accordingly, to prevail on their
276
See 8 Del. C. § 172.
277
Compl. ¶ 30. See also id. ¶¶ 273–76.
278
Friedlander Decl., Ex. 2 § 7.01.
60
breach of fiduciary duty claim, the Plaintiffs must allege particularized facts
establishing that the Director Defendants face a substantial likelihood of liability for
bad faith in connection with the stock repurchases and dividends.
To state a bad faith claim, the Plaintiffs must allege particularized facts that
the Director Defendants “demonstrate[d] a conscious disregard for [their] duties” by
approving the stock repurchases and dividend payments.279 The Plaintiffs do not
attempt to meet this standard, and instead contend only that the Board’s “monitoring
of the Company’s environmental liability exposure” and “reliance on advisors” was
not “reasonable.”280 But reasonableness is not the standard for bad faith.281
Moreover, as discussed above, the Complaint does not plead with particularity that
the Company was ever insolvent. 282 Accordingly, the Director Defendants do not
face a substantial likelihood of liability, and demand is not excused, with respect to
Count III.
279
In re Alloy, Inc., 2011 WL 4863716, at *7 (Del. Ch. Oct. 13, 2011).
280
Pls.’ Answering Br. at 53.
281
In re Citigroup Inc. S’holder Derivative Litig., 964 A.2d 106, 125 (Del. Ch. 2009) (“[W]hen a
plaintiff seeks to show that demand is excused because directors face a substantial likelihood of
liability where ‘directors are exculpated from liability except for claims based on ‘fraudulent,’
‘illegal’ or ‘bad faith’ conduct, a plaintiff must also plead particularized facts that demonstrate that
the directors acted with scienter, i.e., that they had ‘actual or constructive knowledge’ that their
conduct was legally improper.’”) (quoting Wood v. Baum, 953 A.2d 136, 141 (Del. 2008)).
282
See supra § III.A.2.
61
C. Demand Is Not Excused as to the Plaintiffs’ Claims Against the Officer
Defendants (Counts IV–VII)
Finally, demand is not excused with respect to Counts IV–VII, which are
brought only against the Officer Defendants. Counts VI–V seek to hold the Officer
Defendants liable for their stock sales made while allegedly aware that Chemours
was insolvent.283 Counts VI–VII seek to hold the Officer Defendants liable, in the
alternative, for allegedly failing to “share . . . information with the Board” regarding
the “size, scope, and scale of Chemours’s inherited liabilities.” 284 The Plaintiffs’
only articulated basis for demand futility for these claims is that “a majority of the
demand Board faces a substantial likelihood of liability.”285
As the Plaintiffs concede, Counts IV–VII are brought against only one
member of the demand Board, Defendant Vergnano.286 The Plaintiffs contend,
however, that “this Court . . . has excused pre-suit demand for claims even when
such claims were not brought against a majority of the corporation’s current
directors.”287 In particular, the Plaintiffs argue that “‘where a member of the demand
board’s interest extends beyond derivative claims asserted against him to claims
283
Compl. ¶¶ 277–86.
284
Id. ¶¶ 287–300.
285
Id. ¶ 260–62.
286
See Pls.’ Answering Br. at 53.
287
See Pls.’ Answering Br. at 54 (citing Hughes v. Xiaoming Hu, 2020 WL 1987029, at *17–18
(Del. Ch. Apr. 27, 2020); Teamsters Loc. 443 Health Servs. & Ins. Plan v. Chou, 2020 WL
5028065, at *26 (Del. Ch. Aug. 24, 2020); In re CBS Corp. S’holder Class Action & Derivative
Litig., 2021 WL 268779, at *47 (Del. Ch. Jan. 27, 2021), as corrected (Feb. 4, 2021)).
62
asserted against his co-defendants, he is deemed unfit to consider a demand to pursue
those claims as well.’” 288 Therefore, the Plaintiffs contend that because a majority
of the demand Board faces a substantial likelihood of liability as to Counts I–III,
demand is excused as to Counts IV–VII, which purportedly “implicate the same set
of facts” as Counts I–III. 289
The problem with this argument, of course, is that I have held above that the
Director Defendants do not face a substantial likelihood of liability with respect to
Counts I–III.290 Therefore, even to the extent that Counts VI–VII implicate the same
set of facts as Counts I–III, they do not pose a substantial likelihood of liability to
the demand Board, which accordingly, could deploy its business judgment to
evaluate a demand. Demand is not excused.
IV. CONCLUSION
For the foregoing reasons the Motion to Dismiss is GRANTED in its entirety.
The parties should confer and submit a form of order consistent with this opinion.
288
See Pls.’ Answering Br. at 54 (quoting CBS, 2021 WL 268779, at *47).
289
See id. at 54–55.
290
See supra §§ III.A–B.
63