South ex rel. Hecla Mining Co. v. Baker
2012 Del. Ch. LEXIS 229, 62 A.3d 1, 2012 WL 6114952 (2012)
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Rule of Law:
When bringing a derivative claim alleging a board's failure of oversight under Caremark, shareholders must first use the 'tools at hand,' such as a Section 220 books and records inspection, to plead particularized facts showing the board's conscious disregard of its duties; failure to do so may result in dismissal and a finding that the plaintiff is an inadequate representative of the corporation.
Facts:
- Hecla Mining Company, a Delaware corporation, operated the Lucky Friday mine in Idaho.
- Hecla's Board of Directors had a Health, Safety, Environment & Technical Committee (the 'Safety Committee') comprised of four experienced outside directors specifically tasked with overseeing the company's safety performance and compliance.
- On April 15, 2011, a rock fall at the Lucky Friday mine killed a Hecla employee.
- On November 17, 2011, a second fatal accident occurred at the mine involving two contractors during the construction of a new shaft.
- On December 14, 2011, a rock burst occurred at the mine, injuring seven miners and prompting Hecla to close the mine for repairs.
- On January 11, 2012, Hecla announced that the U.S. Mine Safety and Health Administration (MSHA) ordered the primary access shaft closed for the remainder of the year to remove accumulated material, causing the company to lower its silver production projections.
- On January 25, 2012, MSHA issued a press release detailing 59 citations and 15 orders against Hecla for repeated safety failures, including inadequate ground support systems, discovered during inspections.
Procedural Posture:
- Following January 2012 press releases from Hecla and MSHA, two federal securities class actions were filed against Hecla in the U.S. District Court for the District of Idaho.
- Steven and Linda South, shareholders of Hecla, filed a stockholder derivative action on behalf of Hecla against its directors in the Delaware Court of Chancery (court of first instance).
- The Souths' complaint alleged that making a pre-suit demand on the Board of Directors would be futile and was therefore excused.
- The defendant directors 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:
Does a shareholder derivative complaint asserting a Caremark claim plead demand futility with sufficient particularity when it relies on publicly announced safety incidents and regulatory reports without alleging specific facts linking the board to the underlying misconduct or showing an utter failure of oversight?
Opinions:
Majority - Laster, Vice Chancellor
No. A shareholder derivative complaint asserting a Caremark claim does not plead demand futility with sufficient particularity when it relies on publicly announced safety incidents and regulatory reports without alleging specific facts linking the board to the underlying misconduct or showing an utter failure of oversight. To establish demand futility for a Caremark claim, a plaintiff must plead particularized facts creating a reasonable doubt that the board could exercise its independent judgment, which requires showing a substantial likelihood of personal liability for a majority of the directors. This can be done by pleading facts that show: (1) the directors knowingly caused the corporation to violate a positive law; (2) the directors consciously failed to act after learning of 'red flags' indicating illegality; or (3) the directors utterly failed to implement any reporting or information system. Here, the Souths' complaint did none of these. The MSHA reports cited 'management' failures, not board-level decisions, and the mere occurrence of three serious accidents is insufficient to infer conscious disregard by the board. Furthermore, the existence of a dedicated Board Safety Committee with a detailed charter directly refutes the allegation of an 'utter failure' of oversight. The plaintiffs' failure to use Section 220 to investigate for facts connecting the corporate trauma to the board before filing suit was fatal to their complaint.
Analysis:
This decision significantly reinforces the judiciary's expectation that shareholder plaintiffs use Section 220 to investigate before filing a Caremark derivative suit. It establishes an evidentiary presumption that a plaintiff who rushes to file such a claim without investigation is an inadequate representative, serving the interests of their law firm over the corporation. This creates a strong disincentive for the 'race to the courthouse' phenomenon and protects corporations from premature, poorly-pled claims that could preclude more diligent shareholders from pursuing meritorious litigation after a proper investigation.
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