Court of Appeal Applies Caremark/Marchand To Directors of a California Corporation But The Result May Surprise You
Over the years, I have commented on the fact that the California Court of Appeal has yet to apply In re Caremark International Inc., 698 A.2d 959 (Del. Ch. 1996) to the directors of a California corporation. See Still No California Caremark? and California Court Of Appeal Finds Caremark To Be Too Steep A Hill For Plaintiff To Climb. Last Friday, however, the Second District Court of Appeal applied Caremark to a derivative lawsuit against the officers of Sempra Energy and officers and directors of Sempra's subsidiary, Southern California Gas Company (SoCalGas). The underlying basis for the plaintiffs' lawsuit was a the gas leak at the Aliso Canyon Natural Gas Storage facility maintained by SoCalGas which caused Sempra at least $1 billion in damages.
The trial court ruled that the plaintiffs had failed sufficiently to allege that serving a demand on the Board would have been futile. The Court of Appeal found that the California Corporations Code standards for exculpation (Sections 204(a)(10)(iv) (reckless disregard) & (v) (unexcused pattern of inattention that amounts to an abdication of duty)) were consistent with Caremark.
The plaintiffs argued that the directors faced substantial likelihood of liability under Marchand v. Barnhill, 212 A.3d 805 (Del. 2019) for bad faith:
“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.’ In short, to satisfy their duty of loyalty, directors must make a good faith effort to implement an oversight system and then monitor it.”
The Court of Appeal, in a 2-1 decision, disagreed on the basis that the judicially noticed minutes of the board meetings demonstrated the existence of some oversight.
