Marchand v. Barnhill

• Court: Supreme Court of Delaware
• Decided: June 19, 2019
• Docket: 533, 2018
• Status: Published

Opinion

IN THE SUPREME COURT OF THE STATE OF DELAWARE

JACK L. MARCHAND II, § § No. 533, 2018 Plaintiff Below, § Appellant, § Court Below: Court of Chancery § of the State of Delaware v. § § C.A. No. 2017-0586-JRS JOHN W. BARNHILL, JR., GREG § BRIDGES, RICHARD DICKSON, § PAUL A. EHLERT, JIM E. KRUSE, § PAUL W. KRUSE, W.J. RANKIN, § HOWARD W. KRUSE, PATRICIA § I. RYAN, DOROTHY MCLEOD § MACINERNEY and BLUE BELL § CREAMERIES USA, INC., § § Defendants Below, § Appellee. §

Submitted: April 24, 2019 Decided: June 18, 2019 Corrected: June 19, 2019

Before STRINE, Chief Justice; VALIHURA, VAUGHN, SEITZ, and TRAYNOR, Justices, constituting the Court en Banc.

Upon appeal from the Court of Chancery. REVERSED and REMANDED.

Robert J. Kriner, Jr., Esquire (Argued), and Vera G. Belger, Esquire, CHIMICLES SCHWARTZ KRINER & DONALDSON-SMITH LLP, Wilmington, Delaware; Michael Hawash, Esquire, and Jourdain Poupore, Esquire, HAWASH CICACK & GASTON LLP, Houston, Texas, Attorneys for Appellant, Jack L. Marchand II.

Paul A. Fioravanti, Jr., Esquire (Argued), and John G. Day, Esquire, PRICKETT, JONES & ELLIOT, P.A., Wilmington, Delaware, Attorneys for Appellees, John W. Barnhill, Jr., Richard Dickson, Paul A. Ehlert, Jim E. Kruse, W.J. Rankin, Howard W. Kruse, Patricia I. Ryan, Dorothy McLeod MacInerney, and nominal defendant Blue Bell Creameries USA, Inc. Srinivas M. Raju, Esquire, and Kelly L. Freund, Esquire, RICHARDS, LAYTON & FINGER, P.A., Wilmington, Delaware, Attorneys for Appellees, Greg Bridges and Paul W. Kruse.

STRINE, Chief Justice: Blue Bell Creameries USA, Inc., one of the country’s largest ice cream

manufacturers, suffered a listeria outbreak in early 2015, causing the company to

recall all of its products, shut down production at all of its plants, and lay off over a

third of its workforce. Blue Bell’s failure to contain listeria’s spread in its

manufacturing plants caused listeria to be present in its products and had sad

consequences. Three people died as a result of the listeria outbreak. Less

consequentially, but nonetheless important for this litigation, stockholders also

suffered losses because, after the operational shutdown, Blue Bell suffered a

liquidity crisis that forced it to accept a dilutive private equity investment.

Based on these unfortunate events, a stockholder brought a derivative suit

against two key executives and against Blue Bell’s directors claiming breaches of

the defendants’ fiduciary duties. The complaint alleges that the executives—Paul

Kruse, the President and CEO, and Greg Bridges, the Vice President of Operations—

breached their duties of care and loyalty by knowingly disregarding contamination

risks and failing to oversee the safety of Blue Bell’s food-making operations, and

that the directors breached their duty of loyalty under Caremark.1

1 In re Caremark Int’l Inc. Derivative Litig., 698 A.2d 959 (Del. Ch.1996) (Allen, C.); see also App. to Opening Br. at A67–68 (Verified Stockholder Derivative Action Complaint (Aug. 14, 2017)). The defendants moved to dismiss the complaint for failure to plead demand

futility.2 The Court of Chancery granted the motion as to both claims. As to the

claim against management, the Court of Chancery held that the plaintiff “failed to

plead particularized facts that raise a reasonable doubt as to whether a majority of

[Blue Bell’s] Board could impartially consider a demand.”3 Although the complaint

alleged facts sufficient to raise a reasonable doubt as to the impartiality of a number

of Blue Bell’s directors, the plaintiff ultimately came up one short in the Court of

Chancery’s judgment: the plaintiff needed eight directors for a majority, but only

had seven.

As to the Caremark claim, the Court of Chancery held that the plaintiff did

not plead any facts to support “his contention that the [Blue Bell] Board ‘utterly’

failed to adopt or implement any reporting and compliance systems.”4 Although the

plaintiff argued that Blue Bell’s board had no supervisory structure in place to

oversee “health, safety and sanitation controls and compliance,” the Court of

Chancery reasoned that “[w]hat Plaintiff really attempts to challenge is not the

existence of monitoring and reporting controls, but the effectiveness of monitoring

2 App. to Answering Br. at B48–134 (Defendants’ Opening Br. in Support of their Joint Motion to Dismiss (Oct. 30, 2017)); see also Court of Chancery Rule 23.1. 3 Marchand v. Barnhill, 2018 WL 4657159, at *16 (Del. Ch. Sept. 27, 2018). 4 Id. at *18.

2 and reporting controls in particular instances,” and “[t]his is not a valid theory under

. . . Caremark.”5

In this opinion, we reverse as to both holdings.

We first hold that the complaint pleads particularized facts sufficient to create

a reasonable doubt that an additional director, W.J. Rankin, could act impartially in

deciding to sue Paul Kruse, Blue Bell’s CEO, and his subordinate Greg Bridges,

Blue Bell’s Vice President of Operations, due to Rankin’s longstanding business

affiliation and personal relationship with the Kruse family.6 According to the

complaint, Rankin worked at Blue Bell for decades and owes his entire career to Ed

Kruse, the current CEO’s father, who hired Rankin as his administrative assistant in

1981 and promoted him five years later to the position of CFO, a position Rankin

maintained until his retirement in 2014. In 2004, while serving as CFO, Rankin was

elected to Blue Bell’s board, and has served since then. Moreover, the complaint

alleges that the Kruse family showed its appreciation for Rankin not only by

supporting his career, but also by leading a campaign that raised over $450,000 to

name a building at the local university after Rankin. Despite the defendants’

contentions that Rankin’s relationship with the Kruse family was just an ordinary

5 Id. 6 Because we hold that the complaint pleads particularized facts supporting a reasonable inference that Rankin could not be impartial as to suing a member of the Kruse family, we need not, and do not, reach that issue as to the other director whose impartiality the plaintiff challenges on appeal.

3 business relationship from which Rankin would derive no strong feelings of loyalty

toward the Kruse family, these allegations are “suggestive of the type of very close

personal [or professional] relationship that, like family ties, one would expect to

heavily influence a human’s ability to exercise impartial judgment.” 7 Rankin’s

apparently deep business and personal ties to the Kruse family raise a reasonable

doubt as to whether Rankin could “impartially or objectively assess whether to bring

a lawsuit against the sued party.”8

As to the Caremark claim, we hold that the complaint alleges particularized

facts that support a reasonable inference that the Blue Bell board failed to implement

any system to monitor Blue Bell’s food safety performance or compliance. Under

Caremark and this Court’s opinion in Stone v. Ritter,9 directors have a duty “to

exercise oversight” and to monitor the corporation’s operational viability, legal

compliance, and financial performance.10 A board’s “utter failure to attempt to

assure a reasonable information and reporting system exists” is an act of bad faith in

breach of the duty of loyalty.11

7 Sandys v. Pincus, 152 A.3d 124, 130 (Del. 2016). 8 In re Oracle Corp. Derivative Litig., 824 A.2d 917, 942 (Del. Ch. 2003). 9 911 A.2d 362 (Del. 2006). 10 Id. at 364 (quoting In re Caremark Int’l Inc. Derivative Litig., 698 A.2d 959, 971 (Del. Ch.1996)); see also In re Citigroup Inc. S’holder Derivative Litig., 964 A.2d 106, 125 (Del. Ch. 2009) (Chandler, C.). 11 Caremark, 698 A.2d at 971.

4 As a monoline company that makes a single product—ice cream—Blue Bell

can only thrive if its consumers enjoyed its products and were confident that its

products were safe to eat. That is, one of Blue Bell’s central compliance issues is

food safety. Despite this fact, the complaint alleges that Blue Bell’s board had no

committee overseeing food safety, no full board-level process to address food safety

issues, and no protocol by which the board was expected to be advised of food safety

reports and developments. Consistent with this dearth of any board-level effort at

monitoring, the complaint pleads particular facts supporting an inference that during

a crucial period when yellow and red flags about food safety were presented to

management, there was no equivalent reporting to the board and the board was not

presented with any material information about food safety. Thus, the complaint

alleges specific facts that create a reasonable inference that the directors consciously

failed “to attempt to assure a reasonable information and reporting system

exist[ed].”12

12 Id.

5 I. Background13

A. Blue Bell’s History and Operating Environment

i. History

Founded in 1907 in Brenham, Texas, Blue Bell Creameries USA, Inc. (“Blue

Bell”), a Delaware corporation, produces and distributes ice cream under the Blue

Bell banner.14 By 1919, Blue Bell’s predecessor was struggling financially. Blue

Bell’s board turned to E.F. Kruse, who took over the company that year and turned

it around. Under his leadership, the company expanded and became profitable.15

E.F. Kruse led the company until his unexpected death in 1951.16 Upon his

death, his sons, Ed F. Kruse and Howard Kruse, took over the company’s

management. Rapid expansion continued under Ed and Howard’s leadership.17 In

13 The facts come from the plaintiff’s complaint, documents incorporated by reference into the complaint, and the Court of Chancery’s opinion based on these same documents. 14 Blue Bell Creameries USA, Inc. is a holding company. Its only assets are a 69.6 percent interest in Blue Bell Creameries, L.P., which actually produces and distributes ice cream, and a 100 percent interest in Blue Bell Creameries, Inc., the general partner of Blue Bell Creameries, L.P. Because the plaintiff is a stockholder of Blue Bell Creameries USA, the Court of Chancery requested supplemental briefing regarding the fiduciary duties of dual fiduciaries—because the holding company and the general partner have the same executives—and a board’s responsibilities when its only asset is a majority stake in a subsidiary. App. to Opening Br. at A275–83 (Letter from Vice Chancellor Slights to counsel requesting supplement submissions (May 11, 2018)). But in its decision, the Court of Chancery sensibly and properly collapsed the enterprise for purposes of analyzing the complaint. Marchand v. Barnhill, 2018 WL 4657159, at *3 (Del. Ch. Sept. 27, 2018). 15 App. to Opening Br. at A20 (Verified Stockholder Derivative Action Complaint (Aug. 14, 2017)). 16 Id. at A20–21. 17 Id. at A21.

6 2004, Ed Kruse’s son, Paul Kruse, took over management, becoming Blue Bell’s

President and CEO.18 Ten years later, in 2014, Paul Kruse also assumed the position

of Chairman of the Board, taking the position from his retiring father.19

ii. The Regulated Nature of Blue Bell’s Industry

As a U.S. food manufacturer, Blue Bell operates in a heavily regulated

industry. Under federal law, the Food and Drug Administration (“FDA”) may set

food quality standards, require food manufacturing facilities to register with the

FDA, prohibit regulated manufacturers from placing adulterated food into interstate

commerce, and hold companies liable if they place any adulterated foods into

interstate commerce in violation of FDA rules.20 Blue Bell is “required to comply

with regulations and establish controls to monitor for, avoid and remediate

contamination and conditions that expose the Company and its products to the risk

of contamination.”21

Specifically, FDA regulations require food manufacturers to conduct

operations “with adequate sanitation principles”22 and, in line with that obligation,

“must prepare . . . and implement a written food safety plan.”23 As part of a

18 Id. at A28–29. 19 Id. 20 See 21 U.S.C. §§ 333, 341, 342, 350. 21 App. to Opening Br. at A28 (Verified Stockholder Derivative Action Complaint (Aug. 14, 2017)). 22 21 C.F.R. § 110.80. 23 Id. § 117.3.

7 manufacturer’s food safety plan, the manufacturer must include processes for

conducting a hazard analysis that identifies possible food safety hazards, identifies

and implements preventative controls to limit potential food hazards, implements

process controls, implements sanitation controls, and monitors these preventative

controls. Appropriate corporate officials must monitor these preventative controls.24

Not only is Blue Bell subject to federal regulations, but it must also adhere to

various state regulations. At the time of the listeria outbreak, Blue Bell operated in

three states, and each had issued rules and regulations regarding the proper handling

and production of food to ensure food safety.25

B. Plaintiff’s Complaint

With that context out of the way, we briefly summarize the plaintiff’s well-

pled factual allegations and the reasonable inferences drawn from them.

The complaint starts by observing that, as a single-product food company,

food safety is of obvious importance to Blue Bell.26 But despite the critical nature

of food safety for Blue Bell’s continued success, the complaint alleges that

management turned a blind eye to red and yellow flags that were waved in front of

it by regulators and its own tests, and the board—by failing to implement any system

24 Marchand v. Barnhill, 2018 WL 4657159, at *9–11 (Del. Ch. Sept. 27, 2018). 25 Id. 26 App. to Opening Br. at A9 (Verified Stockholder Derivative Action Complaint (Aug. 14, 2017))

8 to monitor the company’s food safety compliance programs—was unaware of any

problems until it was too late.27

i. The Run-Up to the Listeria Outbreak

According to the complaint, Blue Bell’s issues began to emerge in 2009. At

that time, Paul Kruse, Blue Bell’s President and CEO, and his cousin, Paul Bridges,

were responsible for the three plants Blue Bell operated in Texas, Oklahoma, and

Alabama.28 The complaint alleges that, despite being responsible for overseeing

plant operations, Paul Kruse and Bridges failed to respond to signs of trouble in the

run up to the listeria outbreak. From 2009 to 2013 several regulators found troubling

compliance failures at Blue Bell’s facilities:

 In July 2009, the FDA’s inspection of the Texas facility revealed “two instances of condensation, one from a pipe carrying liquid caramel [that] was dripping into three gallon cartons waiting to be filled, and one dripping into ice cream sandwich wafers.”29 The FDA reported these observations directly to Paul Kruse, who assured the FDA that “condensation is treated by Blue Bell as a serious concern.”30

 In March 2010, the Alabama Department of Health inspected the Alabama plant and “found equipment left on the floor and a ceiling in disrepair in the container forming room.”31

 Two months later, in May 2010, the FDA returned to the Texas plant “and observed ten violations that were cited to Paul Kruse 27 Id. at A9–11. 28 Id. at A21. 29 Id. at A25. 30 Id. at A33. 31 Id.

9 including, again, a condensation drip.”32 While the condensation drip persisted from the FDA’s last inspection of the Texas plant, the FDA also observed “ripped and open containers of ingredients, inconsistent hand-washing and glove use and a spider and its web near the ingredients.”33

 In July 2011, an inspection by “the Alabama Department of Public Health cited drips from a ceiling unit and pipelines, standing water, open tank lids and unprotected measuring cups.”34

 Nine months later, in March 2012, an inspection of the Oklahoma facility revealed the plant’s “‘[f]ailure to manufacture foods under conditions and controls necessary to minimize contamination’ and ‘[f]ailure to handle and maintain equipment, containers and utensils used to hold food in [sic] manner that protects against contamination.’”35

 That same month, in March 2012, “[t]he Alabama Department of Public Health required five changes” to the Alabama facility, “including instructions to clean various rooms and items, make repairs and [sic] after fruit processing to prevent contamination.”36 A year later, “in March 2013, the Alabama Department of Public Health again ordered cleaning and repairs and observed an uncapped fruit tank.”37 The Alabama Department of Public Health made similar observations in a July 2014 inspection.38

Regulatory inspections during this time were not the only signal that Blue Bell

faced potential health safety risks. In 2013, “the Company had five positive tests”

32 Id. 33 Id. at A34. 34 Id. 35 Id. 36 Id. 37 Id. 38 Id.

10 for listeria,39 and in January 2014, “the Company received a presumptive positive

[l]isteria result reports from the third party laboratory for the [Oklahoma] facility

on January 20, 2014 and the samples reported positive for a second time on January

24, 2014.”40

Although management had received reports about listeria’s growing presence

in Blue Bell’s plants, the complaint alleges that the board never received any

information about listeria or more generally about food safety issues. Minutes from

the board’s January 29, 2014 meeting “reflect no report or discussion of the

increasingly frequent positive tests that had been occurring since 2013 or the third

party lab reports received in the preceding two weeks.”41 Board meeting minutes

from February and March likewise reflect no board-level discussion of listeria.42

During the rest of 2014, Blue Bell’s problems accelerated, but the board

remained uninformed about Blue Bell’s problems. In April, “[t]he Company

received further positive [l]isteria lab tests regarding [the Oklahoma facility].”43

That same month, the company had three “positive coliform tests far above the

known legal regulator limits.”44 Yet, minutes from the April board meeting reflected

39 Id. at A49–50. 40 Id. at A52. 41 Id. 42 Id. (“[T]here is no reference to Listeria or the lab reports in the minutes of the February or March 2014 meetings.”). 43 Id. 44 Id. at A49–50.

11 no discussion of listeria. Instead, the minutes note only that the Oklahoma and

Alabama facilities’ “plant operations were discussed briefly” and that Bridges also

discussed “a good report from the TCEQ [Texas Commission on Environmental

Quality].”45

Over the course of 2014, Blue Bell received ten positive tests for listeria.

According to the complaint, these positive tests “included repeated positive results

from the Company’s third party laboratory in 2014, on consecutive samples,

evidencing the inadequacy of the Company’s remedial methods to eliminate the

contamination.”46

Despite management’s knowledge of the growing problem, the complaint

alleges that this information never made its way to the board, and the board

continued to be uninformed about (and thus unaware of) the problem. Minutes from

the board’s 2014 meetings are bereft of reports on the listeria issues. Only during

the September meeting is sanitation discussed, when Bridges informed the board that

“[t]he recent Silliker audit [Blue Bell’s third-party auditor for sanitation issues in

2014] went well.”47 This lone reference to a third-party audit is the only instance,

45 Id. at A170 (Minutes to April 29, 2014 board meeting). 46 Id. at A49 (Verified Stockholder Derivative Action Complaint (Aug. 14, 2017)). 47 Id. at A180 (Minutes to September 30, 2014 board meeting). See also Marchand, 2018 WL 4657159, at *6 n.72.

12 until the listeria outbreak forced the recall of Blue Bell’s products, of any board-

level discussion regarding food safety.

At this stage of the case, we are bound to draw all fair inferences in the

plaintiff’s favor from the well-pled facts. Based on this chronology of events, the

plaintiffs have fairly pled that:

 Blue Bell had no board committee charged with monitoring food safety;

 Blue Bell’s full board did not have a process where a portion of the board’s meetings each year, for example either quarterly or biannually, were specifically devoted to food safety compliance; and

 The Blue Bell board did not have a protocol requiring or have any expectation that management would deliver key food safety compliance reports or summaries of these reports to the board on a consistent and mandatory basis. In fact, it is inferable that there was no expectation of reporting to the board of any kind.

In short, the complaint pleads that the Blue Bell board had made no effort at all to

implement a board-level system of mandatory reporting of any kind.

ii. The Listeria Outbreak and the Board’s Response

Blue Bell’s listeria problem spread in 2015. Starting in January 2015, one of

Blue Bell’s product tests had positive coliform levels above legal limits.48 The same

48 App. to Opening Br. at A49–50 (Verified Stockholder Derivative Action Complaint (Aug. 14, 2017)).

13 result appeared in February 2015.49 And by this point, the problem spread to Blue

Bell’s products and spiraled out of control.

On February 13, 2015, “Blue Bell received notification that the Texas

Department of State Health Services also had positive tests for [l]isteria in Blue Bell

samples.”50 The Texas Department of State Health Services was alerted to these

positive tests by the South Carolina Health Department.51 Company swabs at the

Texas facility on February 19 and 21, 2015 tested positive for listeria.52 Yet despite

these reports to management, Blue Bell’s board was not informed by management

about the severe problem. The board met on February 19, 2015, following Blue

Bell’s annual stockholders meeting, but there was no listeria discussion.53

Four days later, Blue Bell initiated a limited recall.54 Two days after that,

Blue Bell’s board met, and Bridges reported that “[t]he FDA is working with Texas

health inspectors regarding the Company’s recent recall of products. More

information is developing and should be known within the next days or weeks.”55

Despite two years of evidence that listeria was a growing problem for Blue Bell, this

is the first time the board discussed the issue, according to the complaint and the

49 Id. 50 Id. at A36, A54. 51 Id. at A54–55. 52 Id. 53 Id. at A55. 54 Marchand v. Barnhill, 2018 WL 4657159, at *7 (Del. Ch. Sept. 27, 2018). 55 App. to Opening Br. at A55 (Verified Stockholder Derivative Action Complaint (Aug. 14, 2017)).

14 incorporated board minutes. Instead of holding more frequent emergency board

meetings to receive constant updates on the troubling fact that life-threatening

bacteria was found in its products, Blue Bell’s board left the company’s response to

management.

And the problem got worse, with awful effects. “In early March 2015, health

authorities reported that they suspected a connection between human [l]isteria

infections in Kansas and products made by Blue Bell’s [Texas] facility.” 56 The

outbreak in Kansas matched a listeria strain found in Blue Bell’s products in South

Carolina. And by March 23, 2015, Blue Bell was forced to recall more products.

Two days later, Blue Bell’s board met and adopted a resolution “express[ing]

support for Blue Bell’s CEO, management, and employees and encourag[ing] them

to ensure that everything Blue Bell manufacture[s] and distributes is a wholesome

and good testing [sic] product that our consumers deserve and expect.”57

Blue Bell expanded the recall two weeks later, and less than a month later, on

April 20, 2015, Blue Bell “instituted a recall of all products.”58 By this point, the

Center for Disease Controls and Prevention (“CDC”) had begun an investigation and

discovered that the source of the listeria outbreak in Kansas was caused by Blue

56 Id. at A36. 57 Id. at A56–57. 58 Id. at A37.

15 Bell’s Texas and Oklahoma plants.59 Ultimately, five adults in Kansas and three

adults in Texas were sickened by Blue Bell’s products; three of the five Kansas

adults died because of complications due to listeria infection.60 The CDC issued a

recall to grocers and retailers, alerting them to the contamination and warning them

against selling the products.61

After Blue Bell’s full product recall, the FDA inspected each of the company’s

three plants. Each was found to have major deficiencies. In the Texas plant, the

FDA found a “failure to manufacture foods under conditions and controls necessary

to minimize the potential for growth of microorganisms,” inadequate cleaning and

sanitizing procedures, “failure to maintain buildings in repair sufficient to prevent

food from coming [sic] adulterated,” and improper construction of the building that

failed to prevent condensation from occurring.62 Likewise, at the Oklahoma facility,

“[t]he FDA found that the Company had been receiving increasingly frequent

positive [l]isteria tests at [the Oklahoma facility] for over three years,” failed “to

manufacture and package foods under conditions and controls necessary to minimize

the potential growth of microorganisms and contamination,” failed to perform

testing to ferret out microbial growth, implemented inadequate cleaning and

59 Id. at A37–38. 60 Id. at A37. 61 Id. 62 Id. at A38; see also id. at A77–80 (Food and Drug Administration Inspection Report for Blue Bell Creameries facility in Brenham, Texas (May 1, 2015)).

16 sterilization procedures, failed to provide running water at an appropriate

temperature to sanitize equipment, and failed to store food in clean and sanitized

portable equipment.63

Although the Alabama facility fared better, the FDA still found contamination

and several issues, including the “failure to perform microbial testing where

necessary to identify possible food contamination,” “failure to maintain food contact

surfaces to protect food from contamination by any source,” and inadequate

construction of the facility such that condensation was likely.64 Most of these

findings, the complaint alleges, are unsurprising because similar deficiencies were

found by the FDA and state regulators in the run up to the listeria outbreak, yet

according to the FDA’s inspection after the fact, it appeared that neither management

nor the board made progress on remedying these deficiencies.

After the fact, various news outlets interviewed former Blue Bell employees

who “claimed that Company management ignored complaints about factory

conditions in [the Texas facility].”65 One former employee “reported [that] spilled

ice cream was left to pool on the floor, ‘creating an environment where bacteria

63 Id. at A38–39 (Verified Stockholder Derivative Action Complaint (Aug. 14, 2017)); see also id. at A82–91 (Food and Drug Administration Inspection Record for Blue Bell Creameries facility in Broken Arrow, Oklahoma (Apr. 23, 2015)). 64 Id. at A40–41 (Verified Stockholder Derivative Action Complaint (Aug. 14, 2017)); see also id. at A94–96 (Food and Drug Administration Inspection Report for Blue Bell Creameries facility in Sylacauga, Alabama (Apr. 30, 2015)). 65 Id. at A35 (Verified Stockholder Derivative Action Complaint (Aug. 14, 2017)).

17 could flourish.’”66 Another former employee described being “instructed to pour ice

cream and fruit that dripped off his machine into mix to be used later.”67

iii. The Aftermath of the Listeria Outbreak

With its operations shuttered, Blue Bell faced a liquidity crisis. Blue Bell

initially sought a more traditional credit facility to bridge its liquidity, but after Blue

Bell director W.J. Rankin informed his brother-in-law, Bill Reimann, about Blue

Bell’s liquidity crunch, Blue Bell ended up striking a deal with Moo Partners, a fund

controlled by Sid Bass and affiliated with Reimann.68 Moo Partners provided Blue

Bell with a $125 million credit facility and purchased a $100 million warrant to

acquire 42% of Blue Bell at $50,000 per share.69 As part of Moo Partners’s

investment conditions, Blue Bell also amended its certificate of incorporation to

grant Moo the right to appoint one member of Blue Bell’s board who would be

entitled to one-third of the board’s voting power (or five votes based on a then-10-

member board).

After investing in Blue Bell, Moo named Reimann to Blue Bell’s board,

expanding the board to 11 members with Reimann possessing five votes.70 In

February 2016, Reimann suggested that the board separate the roles of CEO and

66 Id. 67 Id. at A35–36. 68 Id. at A42–43. 69 Id. 70 Id. at A46.

18 Chairman (both held by Paul Kruse). The board voted to follow Reimann’s

recommendation at its February 18th meeting, but after Paul Kruse disagreed with

the recommendation and threatened to resign as President and CEO if the split

occurred, the board held another vote in which all members, except Reimann and

Rankin, voted to restore the position of CEO and Chairman of the board.71

C. The Court of Chancery Dismisses the Case

After requesting Blue Bell’s books and records through a § 220 request, the

plaintiff, a Blue Bell stockholder, sued Blue Bell’s management and board

derivatively, asserting two claims based on management’s alleged failure to respond

appropriately to the red and yellow flags about growing food safety issues and the

board’s violation of its duty of loyalty, under Caremark, by failing to implement any

reporting system and therefore failing to inform itself about Blue Bell’s food safety

compliance. The Court of Chancery dismissed both claims, holding that the plaintiff

failed to plead demand futility.

As to the first claim, the plaintiff alleges that Paul Kruse, Blue Bell’s President

and CEO, and Bridges, Blue Bell’s Vice President of Operations, had breached their

duties of loyalty and care by knowingly disregarding contamination risks and failing

to oversee Blue Bell’s operations and food safety compliance process.72 “Because

71 Id. at A57–59. 72 Id. at A67 (asserting a “derivative claim for breach of fiduciary duties of loyalty and care for knowingly disregard of contammination [sic] risks and failure to oversee Blue Bell’s operation and compliance”).

19 directors are empowered to manage, or direct the management of, the business and

affairs of the corporation,” the plaintiff’s complaint must allege facts suggesting that

“demand is excused because the directors are incapable of making an impartial

decision regarding such litigation.”73 The plaintiff’s complaint claims that “[a]

demand upon the Board of the Company to pursue claims against Paul Kruse and

Bridges . . . would be futile” because “the Kruse family—of which both Paul Kruse

and Bridges are members—ha[s] long dominated Blue Bell” and the majority of

directors are “long-time employees and/or otherwise beholden and loyal to the Kruse

family.”74

But the Court of Chancery held that the plaintiff “failed to plead particularized

facts to raise a reasonable doubt that a majority of the [Blue Bell board] members

could have impartially considered a pre-suit demand.”75 Without belaboring the

details of the Court of Chancery’s thorough analysis, which is somewhat

complicated due to the unusual structure of Blue Bell’s board, we note that the court

essentially ruled that the plaintiff came up one vote short. To survive the Rule 23.1

motion to dismiss, the complaint needed to allege particularized facts raising a

reasonable doubt that directors holding eight of the 15 votes could have impartially

73 Rales v. Blasband, 634 A.2d 927, 932 (Del. 1993). 74 App. to Opening Br. at A62 (Verified Stockholder Derivative Action Complaint (Aug. 14, 2017)). 75 Marchand v. Barnhill, 2018 WL 4657159, at *2 (Del. Ch. Sept. 27, 2018).

20 considered a demand, but the court held that the plaintiff had done so for directors

holding only seven votes.

One of the directors who the trial court held could consider demand

impartially was Rankin, Blue Bell’s recently retired former CFO. Although Rankin

worked at Blue Bell for 28 years, the court emphasized that he was no longer

employed by Blue Bell, having retired in 2014. As to the allegations that donations

from the Kruse family resulted in a building at Blinn College being named for

Rankin, the court noted that “the Complaint provide[d] no more specifics regarding

the donation (i.e., who gave how much), and ma[de] no attempt to characterize the

materiality of the gesture.”76 That failure, the Court of Chancery concluded, fell

short of Rule 23.1’s particularity requirement. Further, the court noted that Rankin

voted against rescinding a board initiative to split the CEO and Chairman positions

held by Paul Kruse.77 In the court’s view, that act was evidence that Rankin was not

beholden to the Kruse family. Ultimately, the Court of Chancery concluded that the

plaintiff’s “allegation that Rankin lacks independence falls flat.”78

The Court of Chancery also rejected the plaintiff’s second claim that Blue

Bell’s directors breached their duty of loyalty under Caremark by failing to “institute

76 Id. at *15. 77 Id. 78 Id.

21 a system of controls and reporting” regarding food safety. 79 In support of this claim,

the plaintiff asserted, based on the facts alleged in the complaint and reasonable

inferences from those facts, that: (1) the Blue Bell board had no committee

overseeing food safety; (2) Blue Bell’s board did not have any reporting system in

place about food safety; (3) management knew about the growing listeria issues but

did not report those issues to the board, further evidence that the board had no food

safety reporting system in place; and (4) the board did not discuss food safety at its

regular board meetings.

Rejecting the plaintiff’s Caremark claim, the Vice Chancellor started by

observing that “[d]espite the far-reaching regulatory schemes that governed Blue

Bell’s operations at the time of the [l]isteria contamination, the Complaint contains

no allegations that Blue Bell failed to implement the monitoring and reporting

systems required by the FDCA [Federal Food, Drug, and Cosmetic Act], FDA

regulations or state statutes (or that it was ever cited for such a failure).”80 In fact,

the Court of Chancery concluded that “documents incorporated by reference in the

Complaint reveal that Blue Bell distributed a sanitation manual with standard

operating and reporting procedures, and promulgated written procedures for

79 App. to Opening Br. at A68–69 (Verified Stockholder Derivative Action Complaint (Aug. 14, 2017)). 80 Marchand, 2018 WL 4657159, at *11.

22 processing and reporting consumer complaints.”81 And at the board level, the Vice

Chancellor noted that “[b]oth Bridges and Paul Kruse . . . provided regular reports

regarding Blue Bell operations to the . . . Board,” including reports about audits of

Blue Bell’s facilities.82

Based on Blue Bell’s compliance with FDA regulations, ongoing third-party

monitoring for contamination, and consistent reporting by senior management to

Blue Bell’s board on operations, the Court of Chancery concluded that there was a

monitoring system in place. At bottom, the Court of Chancery opined that “[w]hat

Plaintiff really attempts to challenge is not the existence of monitoring and reporting

controls, but the effectiveness of monitoring and reporting controls in particular

instances.”83 That, the Court of Chancery held, does not state a Caremark claim. As

a result, the court held that demand was not excused as to the Caremark claims and

dismissed the complaint.

The plaintiff timely appealed from that dismissal.

81 Id. at *17. 82 Id. 83 Id. at *18 (emphasis in original).

23 II. Analysis

We review a motion to dismiss for failure to plead demand futility de novo.84

A. Rankin’s Independence

We first address the plaintiff’s claim that the Court of Chancery erred by

holding that the complaint did not allege particularized facts that raise a reasonable

doubt as to whether directors holding a majority of the board’s votes could

impartially consider demand as to the management claims. The Court of Chancery

concluded that four directors representing eight votes were independent and that

seven directors representing seven votes were not independent. On appeal, the

plaintiff challenges the Court of Chancery’s conclusion as to only Rankin and one

other director, Paul Ehlert. Holding that the Court of Chancery erred as to either

director would be dispositive. Because we hold that Rankin was not independent

for demand futility purposes, we reverse and need not and do not address whether

Ehlert was independent.

On appeal, both parties agree that the Rales standard applies,85 and we

therefore use it to determine whether the Court of Chancery erred in finding that a

majority of the board was independent for pleading stage purposes. “[A] lack of

84 Beam ex rel. Martha Stewart Living Omnimedia, Inc. v. Stewart, 845 A.2d 1040, 1048 (Del. 2004) (“This Court reviews de novo a decision of the Court of Chancery to dismiss a derivative suit under Rule 23.1.”). 85 See Rales v. Blasband, 634 A.2d 927, 932–34 (Del. 1993).

24 independence turns on ‘whether the plaintiffs have pled facts from which the

director’s ability to act impartially on a matter important to the interested party can

be doubted because that director may feel either subject to the interested party’s

dominion or beholden to that interested party.”86 When it comes to life’s more

intimate relationships concerning friendship and family, our law cannot “ignore the

social nature of humans” or that they are motivated by things other than money, such

as “love, friendship, and collegiality.”87

The standard for conducting this inquiry at the demand futility stage is well

balanced, requiring that the plaintiff plead facts with particularity, but also requiring

that this Court draw all reasonable inferences in the plaintiff’s favor.88 That is, the

plaintiff cannot just assert that a close relationship exists, but when the plaintiff

pleads specific facts about the relationship—such as the length of the relationship or

86 Sandys v. Pincus, 152 A.3d 124, 128 (Del. 2016) (quoting Del. Cty. Emps. Ret. Fund v. Sanchez, 124 A.3d 1017, 1024 n.25 (Del. 2015)). 87 In re Oracle Corp. Derivative Litig., 824 A.2d 917, 938 (Del. Ch. 2003) (“Delaware law should not be based on a reductionist view of human nature that simplifies human motivations on the lines of the least sophisticated notions of the law and economics movement.”); see also Sanchez, 124 A.3d at 1022 (“Close friendships of that duration are likely considered precious by many people, and are rare. People drift apart for many reasons, and when a close relationship endures for that long, a pleading stage inference arises that it is important to the parties.”). 88 Sanchez, 124 A.3d at 1022 (“In that consideration, it cannot be ignored that although the plaintiff is bound to plead particularized facts in pleading a derivative complaint, so too is the court bound to draw all inferences from those particularized facts in favor of the plaintiff, not the defendant, when dismissal of a derivative complaint is sought.”).

25 details about the closeness of the relationship—then this Court is charged with

making all reasonable inferences from those facts in the plaintiff’s favor.89

From the pled facts, there is reason to doubt Rankin’s capacity to impartially

decide whether to sue members of the Kruse family. For starters, one can reasonably

infer that Rankin’s successful career as a businessperson was in large measure due

to the opportunities and mentoring given to him by Ed Kruse, Paul Kruse’s father,

and other members of the Kruse family. The complaint alleges that Rankin started

as Ed Kruse’s administrative assistant and, over the course of a 28-year career with

the company, rose to the high managerial position of CFO.90 Not only that, but

Rankin was added to Blue Bell’s board in 2004,91 which one can reasonably infer

was due to the support of the Kruse family. Capping things off, the Kruse family

spearheaded charitable efforts that led to a $450,000 donation to a key local college,

resulting in Rankin being honored by having Blinn College’s new agricultural

facility named after him.92 On a cold complaint, these facts support a reasonable

inference that there are very warm and thick personal ties of respect, loyalty, and

affection between Rankin and the Kruse family, which creates a reasonable doubt

89 Id. (holding that at the pleading stage this Court is “bound to draw all inferences from those particularized facts in favor of the plaintiff, not the defendant, when dismissal of a derivative complaint is sought”). 90 App. to Opening Br. at A17–18 (Verified Stockholder Derivative Action Complaint (Aug. 14, 2017). 91 Id. 92 Id.

26 that Rankin could have impartially decided whether to sue Paul Kruse and his

subordinate Bridges.

Even though Rankin had ties to the Kruse family that were similar to other

directors that the Court of Chancery found were sufficient at the pleading stage to

support an inference that they could not act impartially in deciding whether to cause

Blue Bell to sue Paul Kruse,93 the Court of Chancery concluded that because Rankin

had voted differently from Paul Kruse on a proposal to separate the CEO and

Chairman position, these ties did not matter.94 In doing so, the Court of Chancery

ignored that the decision whether to sue someone is materially different and more

important than the decision whether to part company with that person on a vote about

corporate governance, and our law’s precedent recognizes that the nature of the

decision at issue must be considered in determining whether a director is

independent.95 As important, at the pleading stage, the Court of Chancery was bound

93 Marchand v. Barnhill, 2018 WL 4657159, at *14–15 (Del. Ch. Sept. 27, 2018) (holding that two directors who both worked at Blue Bell for most, if not all, of their entire careers were beholden to the Kruse family and therefore not independent for demand futility). 94 Id. at *15. 95 See Sandys v. Pincus, 152 A.3d 124, 134 (Del. 2016) (“Causing a lawsuit to be brought against another person is no small matter, and is the sort of thing that might plausibly endanger a relationship.”); Sciabacucchi v. Liberty Broadband Corp., 2018 WL 3599997, at *14 (Del. Ch. July 26, 2018) (“It is reasonable to infer that, if Zinterhofer voted to authorize a derivative suit against Malone, the relationship between Searchlight and Liberty Global might be in jeopardy. After all, ‘[c]ausing a lawsuit to be brought against another person is no small matter, and is the sort of thing that might plausibly endanger a relationship.’”); In re Oracle Corp. Derivative Litig., 824 A.2d 917, 940 (Del. Ch. 2003) (“In evaluating the independence of a special litigation committee, this court must take into account the extraordinary importance and difficulty of such a committee’s responsibility. It is, I daresay, easier to say no to a friend, relative, colleague, or boss

27 to accord the plaintiff the benefit of all reasonable inferences, and the pled facts

fairly support the inference that Rankin owes an important debt of gratitude and

friendship to the Kruse family for giving him his first job, nurturing his progress

from an entry level position to a top manager and director, and honoring him by

spearheading a campaign to name a building at an important community institution

after him. Although the fact that fellow directors are social acquaintances who

occasionally have dinner or go to common events does not, in itself, raise a fair

inference of non-independence,96 our law has recognized that deep and long-

standing friendships are meaningful to human beings and that any realistic

consideration of the question of independence must give weight to these important

relationships and their natural effect on the ability of the parties to act impartially

toward each other. As in cases like Sandys v. Pincus97 and Delaware County

Employees Retirement Fund v. Sanchez,98 the important personal and business

who seeks assent for an act (e.g., a transaction) that has not yet occurred than it would be to cause a corporation to sue that person. This is admittedly a determination of so-called ‘legislative fact,’ but one that can be rather safely made. Denying a fellow director the ability to proceed on a matter important to him may not be easy, but it must, as a general matter, be less difficult than finding that there is reason to believe that the fellow director has committed serious wrongdoing and that a derivative suit should proceed against him.”) (footnotes omitted). 96 See Beam ex rel. Martha Stewart Omnimedia, Inc. v. Stewart, 845 A.2d 1040, 1051–52 (Del. 2004). 97 152 A.3d 124, 130 (Del. 2016) (holding that owning an airplane with the interested party “is suggestive of the type of very close personal relationship that, like family ties, one would expect to heavily influence a human’s ability to exercise impartial judgment”). 98 124 A.3d 1017, 1020–22 (Del. 2015) (holding that being “close personal friends for more than five decades” with the interested party gives rise to “a pleading stage inference . . . that it is important to the parties” and suggests that the director is not independent).

28 relationship that Rankin and the Kruse family have shared supports a pleading-stage

inference that Rankin cannot act independently.

Because the complaint pleads particularized facts that raise a reasonable doubt

as to Rankin’s independence, we reverse the Court of Chancery’s dismissal of the

plaintiff’s claims against management for failure to adequately plead demand

futility.

B. The Caremark Claim

The plaintiff also challenges the Court of Chancery’s dismissal of his

Caremark claim. Although Caremark claims are difficult to plead and ultimately to

prove out,99 we nonetheless disagree with the Court of Chancery’s decision to

dismiss the plaintiff’s claim against the Blue Bell board.

Under Caremark and Stone v. Ritter, a director must make a good faith effort

to oversee the company’s operations.100 Failing to make that good faith effort

breaches the duty of loyalty and can expose a director to liability. In other words,

99 See Stone v. Ritter, 911 A.2d 362, 372 (Del. 2006) (“[A] claim that directors are subject to personal liability for employee failures is possibly the most difficult theory in corporation law upon which a plaintiff might hope to win a judgment.”) (internal quotation marks omitted); Guttman v. Huang, 823 A.2d 492, 506 (Del. Ch. 2003) (“A Caremark claim is a difficult one to prove.”); In re Caremark Int’l Inc. Derivative Litig., 698 A.2d 959, 967 (Del. Ch. 1996) (“The theory here advanced is possibly the most difficult theory in corporation law upon which a plaintiff might hope to win a judgment.”). 100 Caremark, 698 A.2d at 970 (“[I]t is important that the board exercise a good faith judgment that the corporation’s information and reporting system is in concept and design adequate to assure the board that appropriate information will come to its attention in a timely manner as a matter of ordinary operations, so that it may satisfy its responsibility.”).

29 for a plaintiff to prevail on a Caremark claim, the plaintiff must show that a fiduciary

acted in bad faith—“the state of mind traditionally used to define the mindset of a

disloyal director.”101

Bad faith is established, under Caremark, when “the directors [completely]

fail[] to implement any reporting or information system or controls[,] or . . . having

implemented such a system or controls, consciously fail[] to monitor or oversee its

operations thus disabling themselves from being informed of risks or problems

requiring their attention.”102 In short, to satisfy their duty of loyalty, directors must

make a good faith effort to implement an oversight system and then monitor it.

As with any other disinterested business judgment, directors have great

discretion to design context- and industry-specific approaches tailored to their

companies’ businesses and resources.103 But Caremark does have a bottom-line

requirement that is important: the board must make a good faith effort—i.e., try—to

101 Desimone v. Barrows, 924 A.2d 908, 935 (Del. Ch. 2007). 102 Stone, 911 A.2d at 370–72. 103 In re Citigroup Inc. S’holder Derivative Litig., 964 A.2d 106, 125–26 (Del. Ch. 2009) (Chandler, C.) (noting that Caremark “does not eviscerate the core protections of the business judgment rule”); Caremark, 698 A.2d at 970 (“Obviously the level of detail that is appropriate for such an information system is a question of business judgment.”); Desimone, 924 A.2d at 935 n.95 (noting that the approaches boards take to monitoring the corporation under their Caremark duty “will obviously vary because of the different circumstances corporations confront”); see also Caremark, 698 A.2d at 971 (“But, of course, the duty to act in good faith to be informed cannot be thought to require directors to possess detailed information about all aspects of the operation of the enterprise. Such a requirement would simple [sic] be inconsistent with the scale and scope of efficient organization size in this technological age.”).

30 put in place a reasonable board-level system of monitoring and reporting.104 Thus,

our case law gives deference to boards and has dismissed Caremark cases even when

illegal or harmful company activities escaped detection, when the plaintiffs have

been unable to plead that the board failed to make the required good faith effort to

put a reasonable compliance and reporting system in place.105

For that reason, our focus here is on the key issue of whether the plaintiff has

pled facts from which we can infer that Blue Bell’s board made no effort to put in

place a board-level compliance system. That is, we are not examining the

effectiveness of a board-level compliance and reporting system after the fact.

Rather, we are focusing on whether the complaint pleads facts supporting a

reasonable inference that the board did not undertake good faith efforts to put a

board-level system of monitoring and reporting in place.

104 Stone, 911 A.2d at 370; see also Caremark, 698 A.2d at 971 (“Generally where a claim of directorial liability for corporate loss is predicated upon ignorance of liability creating activities within the corporation, . . . only a sustained or systematic failure of the board to exercise oversight—such as an utter failure to attempt to assure a reasonable information and reporting system exists—will establish the lack of good faith that is a necessary condition to liability.”). 105 See, e.g., Stone, 911 A.2d at 372–73 (dismissing a Caremark claim despite the fact that the company violated the Bank Secrecy Act and was fined $50 million); In re General Motors Derivative Litig., 2015 WL 3958724, at *1, 17 (Del. Ch. 2015) (dismissing a Caremark claim despite the fact that the company’s actions “led to monetary loss on the part of the corporation, via fines, damages and punitive damages from lawsuits; reputational damage; and most distressingly, personal injury and death to GM customers”); In re Citigroup Inc. S’holder Derivative Litig., 964 A.2d at 127 (dismissing a Caremark claim despite the fact that the company suffered billions of dollars in losses because of its exposure to subprime mortgages).

31 Under Caremark, a director may be held liable if she acts in bad faith in the

sense that she made no good faith effort to ensure that the company had in place any

“system of controls.”106 Here, the plaintiff did as our law encourages and sought out

books and records about the extent of board-level compliance efforts at Blue Bell

regarding what has to be one of the most central issues at the company: whether it is

ensuring that the only product it makes—ice cream—is safe to eat.107 Using these

books and records, the complaint fairly alleges that before the listeria outbreak

engulfed the company:

 no board committee that addressed food safety existed;

 no regular process or protocols that required management to keep the board apprised of food safety compliance practices, risks, or reports existed;

 no schedule for the board to consider on a regular basis, such as quarterly or biannually, any key food safety risks existed;

 during a key period leading up to the deaths of three customers, management received reports that contained what could be considered red, or at least yellow, flags, and the board minutes of the relevant period revealed no evidence that these were disclosed to the board;

106 Stone, 911 A.2d at 370; see also Caremark, 698 A.2d at 971 (“Generally where a claim of directorial liability for corporate loss is predicated upon ignorance of liability creating activities within the corporation, . . . only a sustained or systematic failure of the board to exercise oversight—such as an utter failure to attempt to assure a reasonable information and reporting system exists—will establish the lack of good faith that is a necessary condition to liability.”). 107 Though, to be fair and completely accurate, Blue Bell does make a few other related products, such as frozen yogurt.

32  the board was given certain favorable information about food safety by management, but was not given important reports that presented a much different picture; and

 the board meetings are devoid of any suggestion that there was any regular discussion of food safety issues.

And the complaint goes on to allege that after the listeria outbreak, the FDA

discovered a number of systematic deficiencies in all of Blue Bell’s plants—such as

plants being constructed “in such a manner as to [not] prevent drip and condensate

from contaminating food, food-contact surfaces, and food-packing material”—that

might have been rectified had any reasonable reporting system that required

management to relay food safety information to the board on an ongoing basis been

in place.108

In sum, the complaint supports an inference that no system of board-level

compliance monitoring and reporting existed at Blue Bell. Although Caremark is a

tough standard for plaintiffs to meet, the plaintiff has met it here. When a plaintiff

can plead an inference that a board has undertaken no efforts to make sure it is

informed of a compliance issue intrinsically critical to the company’s business

operation, then that supports an inference that the board has not made the good faith

effort that Caremark requires.

108 App. to Opening Br. at A94–96 (Food and Drug Administration Inspection Report for Blue Bell Creameries facility in Sylacauga, Alabama (Apr. 30, 2015)).

33 In defending this case, the directors largely point out that by law Blue Bell

had to meet FDA and state regulatory requirements for food safety, and that the

company had in place certain manuals for employees regarding safety practices and

commissioned audits from time to time.109 In the same vein, the directors emphasize

that the government regularly inspected Blue Bell’s facilities, and Blue Bell

management got the results.110

But the fact that Blue Bell nominally complied with FDA regulations does not

imply that the board implemented a system to monitor food safety at the board

level.111 Indeed, these types of routine regulatory requirements, although important,

are not typically directed at the board. At best, Blue Bell’s compliance with these

requirements shows only that management was following, in a nominal way, certain

standard requirements of state and federal law. It does not rationally suggest that

the board implemented a reporting system to monitor food safety or Blue Bell’s

operational performance. The mundane reality that Blue Bell is in a highly regulated

109 Answering Br. at 28–29. 110 Answering Br. at 28–29; see also Marchand v. Barnhill, 2018 WL 4657159, at *17 (Del. Ch. Sept. 27, 2018) (“[D]ocuments incorporated by reference in the Complaint reveal that Blue Bell distributed a sanitation manual with standard operating and reporting procedures, and promulgated written procedures for processing and reporting consumer complaints. Blue Bell engaged a third- party laboratory and food safety auditor to test for the presence of dangerous contaminates in its facilities.”). 111 Stone, 911 A.2d at 368 (“To the contrary, the Caremark Court stated, ‘it is important that the board exercise a good faith judgment that the corporation’s information and reporting system is in concept and design adequate to assure the board that appropriate information will come to its attention in a timely manner as a matter of ordinary operations, so that it may satisfy its responsibility.’”) (quoting Caremark, 698 A.2d at 970) (emphasis added).

34 industry and complied with some of the applicable regulations does not foreclose

any pleading-stage inference that the directors’ lack of attentiveness rose to the level

of bad faith indifference required to state a Caremark claim.

In answering the plaintiff’s argument, the Blue Bell directors also stress that

management regularly reported to them on “operational issues.” This response is

telling. In decisions dismissing Caremark claims, the plaintiffs usually lose because

they must concede the existence of board-level systems of monitoring and oversight

such as a relevant committee, a regular protocol requiring board-level reports about

the relevant risks, or the board’s use of third-party monitors, auditors, or

consultants.112 For example, in Stone v. Ritter, although the company paid $50

112 See, e.g., City of Birmingham Ret. Sys. v. Good, 177 A.3d 47, 59 (Del. 2017) (affirming the Court of Chancery’s dismissal of a Caremark claim because “reports to the board showed that the board ‘exercised oversight by relying on periodic reports’ from the officers” and that board presentations “identified issues with the coal ash disposal ponds, but also informed the board of the actions taken to address the regulatory concerns”); Stone, 911 A.2d at 372–73 (affirming the Court of Chancery’s dismissal of a Caremark claim, in part, because an outside auditor’s report “reflect[s] that the Board received and approved relevant policies and procedures, delegated to certain employees and departments the responsibility for filing [suspicious activity reports] and monitoring compliance, and exercised oversight by relying on periodic reports from them”); In re General Motors Derivative Litig., 2015 WL 3958721, at *14 (Del. Ch. 2015) (dismissing a Caremark claim where “GM had a system for reporting risk to the Board, but in the Plaintiffs’ view it should have been a better system”); In re Citigroup Inc. S’holder Derivative Litig., 964 A.2d 106, 127 (Del. Ch. 2009) (dismissing a Caremark claim because “[p]laintiffs do not contest that Citigroup had procedures and controls in place that were designed to monitor risk”); Desimone v. Barrows, 924 A.2d 908, 940 (Del. Ch. 2007) (dismissing a Caremark claim premised on the plaintiff’s allegations that a properly formed and well-functioning audit committee must have known about options backdating despite the fact that management intentionally kept this information from the audit committee); Guttman v. Huang, 823 A.2d 492, 506–07 (Del. Ch. 2003) (dismissing a Caremark claim because the plaintiff failed to plead any particularized facts about the audit committee’s lack of reporting or information systems).

35 million in fines related “to the failure by bank employees” to comply with “the

federal Bank Secrecy Act,”113 the“[b]oard dedicated considerable resources to the

[Bank Secrecy Act] compliance program and put into place numerous procedures

and systems to attempt to ensure compliance.”114 Accordingly, this Court affirmed

the Court of Chancery’s dismissal of a Caremark claim. Here, the Blue Bell

directors just argue that because Blue Bell management, in its discretion, discussed

general operations with the board, a Caremark claim is not stated.

But if that were the case, then Caremark would be a chimera. At every board

meeting of any company, it is likely that management will touch on some operational

issue. Although Caremark may not require as much as some commentators wish,115

it does require that a board make a good faith effort to put in place a reasonable

system of monitoring and reporting about the corporation’s central compliance risks.

In Blue Bell’s case, food safety was essential and mission critical. The complaint

pled facts supporting a fair inference that no board-level system of monitoring or

reporting on food safety existed.

113 911 A.2d at 365–66. 114 Id. at 371. 115 See, e.g., John Armour, et al., Board Compliance, 104 MINNESOTA L. REV. (forthcoming 2020) (manuscript at 47), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3205600; John Armour & Jeffrey N. Gordon, Systemic Harms and Shareholder Value, 6 J. LEGAL ANALYSIS 35, 46 (2014); Hillary A. Sale, Monitoring Caremark’s Good Faith, 32 DEL. J. CORP. L. 719, 753 (2007).

36 If Caremark means anything, it is that a corporate board must make a good

faith effort to exercise its duty of care. A failure to make that effort constitutes a

breach of the duty of loyalty. Where, as here, a plaintiff has followed our

admonishment to seek out relevant books and records116 and then uses those books

and records to plead facts supporting a fair inference that no reasonable compliance

system and protocols were established as to the obviously most central consumer

safety and legal compliance issue facing the company, that the board’s lack of efforts

resulted in it not receiving official notices of food safety deficiencies for several

years, and that, as a failure to take remedial action, the company exposed consumers

to listeria-infected ice cream, resulting in the death and injury of company

customers, the plaintiff has met his onerous pleading burden and is entitled to

discovery to prove out his claim.

III. Conclusion

We therefore reverse the Court of Chancery’s decision and remand for

proceedings consistent with this opinion.

116 See Sandys v. Pincus, 152 A.3d 124, 128 (Del. 2016) (“For many years, this Court and the Court of Chancery have advised derivative plaintiffs to take seriously their obligations to plead particularized facts justifying demand excusal.”).