In Re Transunion Derivative Stockholder Litigation
Not available in text (2024)
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Rule of Law:
A board of directors does not breach its duty of loyalty for failure of oversight where it makes good faith efforts to oversee compliance with a regulatory consent order. Imperfect compliance or ongoing, technical interpretive disputes with a regulator do not, without more, support an inference of bad faith or purposeful lawbreaking.
Facts:
- In 2015, the Consumer Financial Protection Bureau (CFPB) began investigating TransUnion's advertising and marketing practices, focusing on its VantageScore disclosures and 'Negative Option' automatic billing structures.
- In January 2017, TransUnion entered into a Consent Order with the CFPB, agreeing to remediate these practices, pay penalties, and submit Compliance and Redress Plans for CFPB review.
- TransUnion took immediate steps, including paying a $3 million penalty, depositing $13.9 million for consumer redress, and removing the Negative Option feature from its own website.
- TransUnion submitted its Compliance Plan but, based on advice from outside counsel, waited to implement certain changes pending a 'determination of non-objection' from the CFPB, which was never provided.
- In May 2019, the CFPB issued a 'PARR' letter asserting TransUnion was non-compliant, highlighting issues such as disclaimer font size, the use of the phrase 'may not' instead of 'not likely,' and a negative option on a third-party website.
- In response to the PARR letter and subsequent CFPB enforcement actions (including CIDs and NORA letters), TransUnion management took corrective steps, hired new counsel, and formed internal committees to oversee compliance.
- Throughout the process, TransUnion management and its committees regularly updated the Board of Directors and its Audit and Compliance Committee on the status of the CFPB dispute and the company's remediation efforts.
- The ongoing dispute over compliance eventually led the CFPB to file a lawsuit against TransUnion in federal court in April 2022, where the same interpretive issues remain contested.
Procedural Posture:
- TransUnion stockholders Richard Delman, Donna Nicosia, and Charles R. Blackburn filed derivative actions against the TransUnion board of directors in the Delaware Court of Chancery.
- The court consolidated the separate lawsuits.
- Plaintiffs filed a consolidated complaint alleging breach of fiduciary duty, arguing that making a pre-suit demand on the board would have been futile.
- The defendants filed a motion to dismiss the complaint under Court of Chancery Rule 23.1 for failure to adequately plead demand futility and under Rule 12(b)(6) for failure to state a claim.
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Issue:
Does a board of directors face a substantial likelihood of liability for breach of the duty of loyalty when it oversees management's good faith, albeit imperfect, efforts to comply with a regulatory consent order, where the alleged non-compliance stems from technical, interpretive disagreements with the regulator?
Opinions:
Majority - Vice Chancellor Will
No. A board does not face a substantial likelihood of liability where the pleaded facts show it made good faith efforts to oversee compliance with a consent order, even if those efforts were imperfect and resulted in ongoing, technical disputes with a regulator. To establish oversight liability under Caremark, a plaintiff must plead particularized facts showing bad faith, such as an utter failure to attempt to assure a reasonable information system exists or a conscious failure to monitor or oversee its operations. Here, the plaintiffs' allegations fail because the facts demonstrate the board was engaged and oversaw TransUnion's compliance efforts. The board was regularly updated, relied on expert counsel, and monitored management's response to the CFPB. The alleged violations were not ignored; they were the subject of an ongoing, good-faith dispute with the regulator over minor, technical interpretations of the Consent Order, such as font size and phrasing. Such 'quibbles' about the speed or perfection of compliance efforts, which amount to critiques with the benefit of hindsight, are insufficient to support a claim of bad faith or purposeful lawbreaking.
Analysis:
This decision reinforces the high pleading standard for Caremark claims, emphasizing that director engagement and good faith efforts to oversee compliance will defeat such claims, even if the company's efforts are ultimately deemed imperfect by a regulator. It clarifies that a plaintiff cannot re-characterize a weak 'failure to monitor' claim into a more serious 'intentional law-breaking' (Massey) claim simply because the board was aware of ongoing, technical disputes over regulatory compliance. The opinion protects directors from liability for good faith disagreements over legal interpretations, distinguishing such disputes from a conscious disregard of known, material violations of law. This solidifies the principle that liability attaches for a conscious dereliction of duty, not for imperfect or ultimately unsuccessful attempts at compliance.
