Not a Lexis Advance subscriber? Try it out for free.

Stone v. Ritter

Supreme Court of Delaware

October 5, 2006, Submitted ; November 6, 2006, Decided

No. 93, 2006

Opinion

 [*364]  HOLLAND, Justice:

This is an appeal from a final judgment of the Court of Chancery dismissing a derivative complaint against fifteen present and former directors of AmSouth Bancorporation ("AmSouth"), a Delaware corporation.  [**2]  The plaintiffs-appellants, William and Sandra Stone, are AmSouth shareholders and filed their derivative complaint without making a pre-suit demand on AmSouth's board of directors (the "Board"). The Court of Chancery held that the plaintiffs had failed to adequately plead that such a demand would have been futile. The Court, therefore, dismissed the derivative complaint under Court of Chancery Rule 23.1.

The Court of Chancery characterized the allegations in the derivative complaint as a "classic Caremark claim," a claim that derives its name from In re Caremark Int'l Deriv. Litig. 1 [**3]  In Caremark, the Court of Chancery recognized that: ] "[g]enerally 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." 2

In this appeal, the plaintiffs acknowledge that the directors neither "knew [n]or should have known that violations of law were occurring," i.e., that there were no "red flags" before the directors. Nevertheless, the plaintiffs argue that the Court of Chancery erred by dismissing the derivative complaint which alleged that "the defendants had utterly failed to implement any sort of statutorily required monitoring, reporting or information controls that would have enabled them to learn of problems requiring their attention." The defendants argue that the plaintiffs' assertions are contradicted by the derivative complaint itself and by the documents incorporated therein by reference.

 [*365]  Consistent with our opinion in In re Walt Disney Co. Deriv Litig, we hold that Caremark articulates the necessary conditions for assessing director [**4]  oversight liability. 3 We also conclude that the Caremark standard was properly applied to evaluate the derivative complaint in this case. Accordingly, the judgment of the Court of Chancery must be affirmed.

Read The Full CaseNot a Lexis Advance subscriber? Try it out for free.

Full case includes Shepard's, Headnotes, Legal Analytics from Lex Machina, and more.

911 A.2d 362 *; 2006 Del. LEXIS 597 **

WILLIAM STONE AND SANDRA STONE, derivatively on behalf of Nominal Defendant AmSOUTH BANCORPORATION, Plaintiffs Below, Appellants, v. C. DOWD RITTER, RONALD L. KUEHN, JR., CLAUDE B. NIELSEN, JAMES R. MALONE, EARNEST W. DAVENPORT, JR., MARTHA R. INGRAM, CHARLES D. McCRARY, CLEOPHUS THOMAS, JR., RODNEY C. GILBERT, VICTORIA B. JACKSON, J. HAROLD CHANDLER, JAMES E. DALTON, ELMER B. HARRIS, BENJAMIN F. PAYTON, and JOHN N. PALMER, Defendants Below, Appellees, and AmSOUTH BANCORPORATION, Nominal Defendant Below, Appellee.

Prior History:  [**1]  Court Below -- Court of Chancery of the State of Delaware, in and for New Castle County. C.A. No. 1570-N.

Disposition: AFFIRMED.

CORE TERMS

compliance, good faith, oversight, derivative, employees, reporting system, fiduciary, board of directors, failure to act, plaintiffs', reporting, necessary condition, suspicious activity, controls, loyalty, fiduciary duty, monitoring, lack of good faith, utter failure, regulations, systematic, excused

Business & Corporate Law, Management Duties & Liabilities, Fiduciary Duties, Duty of Good Faith, Causes of Action, Misfeasance & Nonfeasance, Actions Against Corporations, Derivative Actions, General Overview, Banking Law, Criminal Offenses, Money Laundering, Bank Secrecy Act, Bank Accounts, Deposit Accounts, Civil Procedure, Class Actions, Demand Futility, Procedural Matters, Pleadings, Complaints, Requirements for Complaint, Demand Requirement, Duty of Care, Duty of Loyalty, Appeals, Standards of Review, De Novo Review, Responses, Defenses, Demurrers & Objections, Motions to Dismiss