Wednesday, August 08, 2012

Delaware Chancery Says No Demand Futility Because of Alleged Breach of Duty of Care to Have CEO Succession Plan

In a shareholder derivative action, demand was not excused as futile because of the allegation that directors breached their duty of care by not having a succession plan in place upon the company CEO’s unexpected termination, ruled the Delaware Chancery Court. The shareholder claimed that the termination harmed the company by effectively leaving the company leaderless, a harm that would not have occurred if the directors had anticipated the risk and had in place a formal succession plan. (Zucker v, Andreessen, CA No. 6014-VCP, June 21, 2012)

But Vice Chancellor Parsons said that the shareholder did not cite, nor was the court aware of any Delaware precedent that stands for the proposition that failure to adopt a long-term succession plan amounts to a breach of duty. Even accepting the assertion that long-term succession planning is so critical to sound corporate governance that there ought to be a fiduciary duty expressly requiring it and that the stockholders were harmed because the board carelessly failed to implement such a plan, continued the court, the shareholder did not identify any case law or allege any facts suggesting that the directors have been or are on notice that such a failure is a breach of fiduciary duty. Thus, the board could not have consciously disregarded a known duty to act sufficient to rise to the level of bad faith.

In these circumstances, there was no basis on which to find demand futility, said the court, regardless of whether Delaware, as a normative matter, should adopt an express requirement that corporate fiduciaries must implement long term succession plans. In reaching this conclusion, the court did not address whether the duty of care requires directors to adopt succession plans, and expressed no view on that issue.

Rather, the limited holding of the court’s analysis is that there can be no substantial threat of personal liability predicated on bad faith disregard of a known duty to implement a succession plan because the shareholder failed to allege a basis from which the existence of such a known duty reasonably could be inferred. Any threat of personal liability, therefore, was insufficient to raise a reasonable doubt that the directors could have responded disinterestedly and independently to a pre-suit demand had the shareholder made one.