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Law School Case Brief

Stone v. Ritter - 911 A.2d 362 (Del. 2006)

Rule:

The necessary conditions predicate for director oversight liability are: (a) the directors utterly failed to implement any reporting or information system or controls; or (b) having implemented such a system or controls, consciously failed to monitor or oversee its operations thus disabling themselves from being informed of risks or problems requiring their attention. In either case, imposition of liability requires a showing that the directors knew that they were not discharging their fiduciary obligations. Where directors fail to act in the face of a known duty to act, they breach their duty of loyalty by failing to discharge that fiduciary obligation in good faith.

Facts:

Two individuals were operating a Ponzi scheme, which operated the majority of its funding through AmSouth bank. Ultimately, two Ponzi schemers were convicted and the bank was required to pay over $50 million in fines. The evidence suggests that employees would have discovered this information immediately had they instituted any basic monitoring system. As result of the loss to the company in fines, shareholders sued the bank derivatively claiming a lack of oversight on the part of the directors.

Issue:

When specified facts do not create a reasonable doubt that the directors of a corporation acted in good faith in exercising their oversight responsibilities, will a derivative suit be dismissed for failure to make demand?

Answer:

Yes

Conclusion:

Where a business decision was not involved, as in this case, the standard to determine demand futility is whether the particularized factual allegations create a reasonable doubt that, as of the time the complaint was filed, the directors could have exercised their independent and disinterested business judgment in response to a demand.  The Plaintiffs’ attempt to satisfy this standard by claiming that the Defendant faces a substantial likelihood of personal liability, and therefore causes them to be interested in the outcome.  This argument, however, must take into account the certificate of incorporation’s exculpatory clause, which can exculpate Defendant from a breach of the duty of care, but not a breach of their duty of loyalty or a breach that is not in good faith.  The failure to act in good faith is a condition to finding a breach of the fiduciary duty of loyalty and imposing fiduciary liability.  “[A] failure to act in good faith is not conduct that results, ipso facto, in the direct imposition of fiduciary liability.” Failing to act in good faith may result in liability because the requirement to act in good faith is a condition of the duty of loyalty. 

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