September 23, 2019

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Chancery Court Dismisses Derivative Suit Against Blue Bell Officers and Directors

In Jack L. Marchand II v. John W. Barnhill, Jr., et al, the Delaware Chancery Court dismissed Plaintiff’s complaint under Court of Chancery Rule 23.1, finding that Plaintiff failed to plead particularized facts that an appeal for board action on the complaint would have been futile or that a majority of the company’s board lacked the independence needed to respond.

Plaintiff is a stockholder of Blue Bell Creameries USA, Inc. (“BB USA”). BB USA wholly owns Blue Bell Creameries, Inc. (“BB GP”), the general partner of Blue Bell Creameries, L.P. (“BB LP”), the enterprise’s operating subsidiary. In 2015, the Food & Drug Administration (“FDA”) and several state health agencies found Listeria monocytogenes bacteria in Blue Bell ice cream products. A few months later, Blue Bell recalled all of its products and shut down all of its production operations. Soon thereafter, Blue Bell fired or suspended more than half of its workforce and ceased paying distributions to its limited partners. Government authorities fined Blue Bell for its poor safety policies and practices related to the Listeria outbreak.

Previously in a companion case, Wenske v. Blue Bell Creameries, Inc., the court found that the limited partner plaintiffs had stated viable breach of contract claims against the general partner for failing to prevent the same Listeria crisis that prompted the case here. Here, Plaintiff purports to bring derivative claims on behalf of BB USA against two BB USA corporate officers (the “Officer Defendants”) and all BB USA directors except one (the “Director Defendants”) for breach of fiduciary duty. Specifically, the complaint set forth two counts: Count I against the Officer Defendants for breaching their fiduciary duties of loyalty and care to BB USA, and Count II against the Director Defendants for breaching their fiduciary duties of loyalty to BB USA. Defendants moved to dismiss the complaint. The court dismissed the complaint, finding that Plaintiff had failed to plead particularized facts to raise a reasonable doubt that a majority of the BB USA board members could have impartially considered a pre-suit demand to prosecute Count I against the Officer Defendants. For Count II, the court found that Plaintiff had failed to state a claim based on In re Caremark Int’l Inc. Deriv. Litig., 698 A.2d 959 (Del. Ch. 1996) against the Director Defendants and consequently failed to plead particularized facts to raise a reasonable doubt that a majority of the otherwise disinterested BB USA board could have exercised their business judgment in responding to a demand.

Stockholder derivative suits “by their very nature impinge on the managerial freedom of directors,” thus Delaware law requires that a stockholder satisfy the threshold demand requirements of Court of Chancery Rule 23.1. In order to do so, the plaintiff must demand that the board of directors pursue the claim, or alternatively, demonstrate that a demand on the board would be futile such that the demand requirement should be excused. When a derivative plaintiff elects not to make a demand upon the board, Rule 23.1 places a heightened pleading burden on the plaintiff to meet “stringent requirements of factual particularity that differ substantially from the permissive notice pleadings.”

In Count I, Plaintiff maintained that a majority of the BB USA board have such close ties to the Officer Defendants that they would be incapable of impartially considering a demand to bring a fiduciary claim against them on behalf of BB USA. The inquiry for director independence is contextual and asks whether a director’s decision was “based on the merits of the subject before the board rather than on extraneous considerations or influences.” To show lack of independence, the plaintiff must allege that a director is so beholden to an interested director that his or her discretion would be sterilized. With those standards in mind, the court, noting that its function is to “count heads,” found that Plaintiff failed to plead particularized facts that raised a reasonable doubt as to whether directors controlling eight of the BB USA board’s fifteen votes would have been capable of impartially considering a demand.

As for Count II alleging that the Director Defendants breached their fiduciary duties of loyalty to BB USA, the court looked to the standard articulated in Caremark. A plaintiff must allege particularized facts that satisfy one of the necessary conditions for director oversight liability in Caremark: either (1) “the directors utterly failed to implement any reporting or information system or controls;” or (2) “having implemented such a system or controls, [the directors] consciously failed to monitor or oversee its operations thus disabling themselves from being informed of risks or problems requiring their attention.” Plaintiff’s principal argument was that the Director Defendants failed in their oversight duty under Caremark’s first prong by failing to implement any reporting or information systems or controls at BB USA. However, the court found that Plaintiff plead no facts that the BB USA board utterly failed to adopt or implement any reporting and compliance systems, but was rather attempted to challenge the effectiveness of monitoring and reporting controls in particular instances, which is not a valid theory under the first prong of Caremark. Further, the court could not discern whether Plaintiff intended to advance a second-prong Caremark claim, as the complaint did not plead “that the board knew of evidence of corporate misconduct—the proverbial ‘red flag’–yet acted in bad faith by consciously disregarding its duty to address that misconduct.” While Plaintiff argued that the BB USA board did not see the Listeria crisis coming, but would have with proper oversight, the court rejected that as a basis for a Caremark claim. At best, the court stated that Plaintiff had pled that the monitoring systems in place did not work as intended, which is not a basis to impose personal liability upon directors. Accordingly, the court found that Plaintiff failed to plead particularized facts that any of the Director Defendants breached their scienter-laden fiduciary duty of oversight or that a majority of the BB USA board members could not impartially consider a demand to bring claims against the Officer Defendants.

Marchand v. Barnhill et al. and Blue Bell Creameries USA, Inc., nom. def…

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About this Author

Scott Waxman, Limited Liability Companies, Corporate, Attorney, KL Gates Law FIrm
Administrative Partner

Scott Waxman is a founding partner in the firm’s Wilmington, Delaware office and a member of the firm’s global Management Committee. His practice focuses on organizational and operational issues related to limited liability companies, limited and general partnerships, statutory trusts, and special purpose corporations, as well as general commercial and financial transactions, including structured financings, securitizations, mergers and acquisitions, joint ventures, private equity and hedge funds, preferred securities transactions, insurance premium financing transactions, life settlement...

Stephanie Liu, KL Gates Law Firm, Mergers and Acquisitions Attorney

Stephanie Liu is an associate in the firm’s Seattle office. Her practice focuses on corporate and transactional law, including mergers and acquisitions, venture capital financings, emerging growth companies, securities law compliance, and corporate governance.