In re The Chemours Company Derivative Litigation
Not provided in case text (2021)
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Rule of Law:
Under Delaware law, directors are fully protected from personal liability for authorizing unlawful stock repurchases or dividends under DGCL § 174 if, pursuant to DGCL § 172, they rely in good faith upon corporate records, officers, or expert opinions in determining that the corporation has adequate surplus for such distributions.
Facts:
- In 2015, E. I. DuPont de Nemours and Company ('DuPont') spun off its Performance Chemicals division to create The Chemours Company ('Chemours').
- As part of the spin-off, DuPont transferred massive, unresolved environmental liabilities, particularly related to PFAS chemicals, to Chemours, providing liability estimates that Chemours later alleged were vastly understated.
- Chemours's then-CFO, Mark Newman, refused to certify the accuracy of DuPont's liability estimates, instead signing a revised certification stating he was relying on DuPont for their accuracy.
- Following the spin-off, Chemours faced financial difficulties and litigation over the environmental liabilities continued to mount in Ohio, New Jersey, and North Carolina.
- Between 2017 and 2019, the Chemours board of directors received regular updates on the escalating environmental litigation.
- During this same period, the Chemours board approved stock repurchase programs totaling up to $1.5 billion and significantly increased quarterly dividends, expending approximately $1.07 billion on repurchases and $667 million on dividends.
- The board's resolutions approving these capital returns stated they complied with Delaware law, based on determinations of corporate surplus calculated using GAAP principles and advice from officers and financial advisors.
- In May 2019, Chemours sued DuPont, alleging in its complaint that if Chemours were held responsible for the full, unlimited environmental liabilities, it would have been insolvent at the time of the spin-off.
Procedural Posture:
- Shareholders filed a consolidated derivative action in the Delaware Court of Chancery on behalf of The Chemours Company against its directors and certain officers.
- The complaint alleged that the defendants authorized illegal stock repurchases and dividend payments in violation of DGCL §§ 160, 173, and 174, and breached their fiduciary duties.
- The plaintiffs did not make a pre-suit demand on the Chemours board to initiate the litigation.
- Plaintiffs argued that demand was futile solely on the grounds that a majority of the board faced a substantial likelihood of personal liability for the alleged misconduct.
- The defendants filed a motion to dismiss the complaint under Court of Chancery Rule 23.1 for failure to adequately plead demand futility.
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Issue:
Do corporate directors face a substantial likelihood of liability under DGCL § 174 for authorizing stock repurchases and dividends, thereby excusing pre-suit demand as futile, when they relied on GAAP-based financial records to determine corporate surplus while being aware of massive contingent environmental liabilities?
Opinions:
Majority - Vice Chancellor Glasscock
No. The directors do not face a substantial likelihood of liability because they are protected by DGCL § 172 for their good-faith reliance on corporate records and expert advice. To excuse demand, plaintiffs must show that a majority of the board faces a substantial risk of liability for a non-exculpated claim. Here, the central claim is under DGCL § 174, which imposes liability for willful or negligent violations of surplus requirements for dividends (§ 173) and stock repurchases (§ 160). However, § 174 must be read with § 172, which 'fully protects' directors who rely in good faith on corporate records, officers, or experts to determine the existence of surplus. The complaint itself demonstrates that the board was advised by officers and financial advisors and relied on GAAP-based accounting, which is a generally accepted method. The plaintiffs' argument that the board's reliance on GAAP was negligent due to the contingent liabilities fails because they did not plead particularized facts showing this reliance was unreasonable or in bad faith. Furthermore, the court rejected the plaintiffs' characterization of Chemours's lawsuit against DuPont as an 'admission' of insolvency; rather, it was a conditional, hypothetical allegation made as a litigation tactic. Because the directors are shielded by § 172, they do not face a substantial likelihood of liability, demand is not futile, and the derivative complaint must be dismissed.
Analysis:
This opinion solidifies the powerful protection afforded to directors by DGCL § 172 against claims of unlawful corporate distributions under § 174. It establishes that good-faith reliance on standard accounting practices (GAAP) and expert advice is a sufficient defense against claims of negligence, even when the board is aware of immense, unquantified contingent liabilities. The decision raises the bar for plaintiffs in derivative suits, making it significantly more difficult to plead demand futility by attacking a board's surplus calculations. The court's refusal to treat allegations from a separate lawsuit as binding admissions of fact also reinforces the principle that litigation postures are not equivalent to factual concessions for establishing director liability.
