Filed 6/2/23 CERTIFIED FOR PUBLICATION

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

SECOND APPELLATE DISTRICT

DIVISION FIVE

RHODA A . KAN TER et al.,

Plaintiffs and App ellants,

v.

DEBRA L. RE ED et al.,

Defendants and Respondents. B312 129

( Los Angeles County Super. Ct. Nos. JCCP4861, BC611319, BC617444, BC664302, 37

- 2

- 16

- 000058421)

APPEAL fro m a judgment of the Superior Cou rt of Los Angeles County, Daniel J. Buckley, Judge. Affirmed. Westerman, Jef

f S. Westerm an and Guido E. Toscano for Plaintiffs and Appellants. Complex Appellate Litigation Group, Rex S. Heinke,
Jessica M. Weisel; Gardy & Notis and Jen nifer Sarnelli for Plaintiff and Appellant Rh oda A. Kanter. Bottini & Bottini, Francis A. Bottin i, Jr., Albe rt Y. Chang, and Yury A. Kolesnikov for Plaintiff and Appellant Arlander
Favors.2 Robbins, George Aguilar and Brian R obbins for Plaint iff and Appell ant Nancy F. Lewis , as Trustee for the Nancy F. Lewis
Trust. Bragar Eagel & Squire, W. Scott Ho lleman, Mari on C.
Passmore

, and Melissa Fortunato ; Glancy Prongay & Murray, Robert V. Prongay and Ex Kano S. Sams, II for Plainti ff and Appellant Erst e Asset Manage ment G mb H. Morgan , Lewis & Bockius, Thomas M. Peterson, Robert H. O’Leary

, and J. Warren Ri ssier for De fenda nt and Respondent Sempra Energy. O’Melveny & Myers, Matthew W. Close, Brittany Rogers

, and Kelly McDonnell for D e fendants and Responde nts Dennis V. Arriola, Steven D. Davis, Joseph A. Househol der, Jessie J. Knight, Jr., J. Bret Lane, and Martha B. Wy rsch

. Skadden, Arps, Slate, Meagher, & Flom and Allen L. Lanstra for Defendants and Respondents Alan L. Boeckmann,
J a m es G. Brocksmith , Jr. , Kathleen L. Brown, Pablo A. Fe rrero, William D. Jones, W illiam G. Ouchi, Debra L. Reed, William C.
Rus nack, Willia m P. R utledge, Lynn Schenk, Jack T. Taylor, and James C. Yardley

.3 I. INTRODUCTION

In this shareholder s ’ derivativ e action, p laintiff s 1 a ppe al
from a dismissal entered after the trial co u rt sustained a
demurrer on the grounds that plaintiff s fail ed to a llege facts
suf ficient to show that a presuit demand on the b oard of d irectors (Board) of nominal defendant Sempra En e r gy (Sempra ) was

exc used b y futility

. 2 We affirm.

1 Pl ai nt i ffs a r e A rlan de r Fav o rs, Rhod a A. Kanter, Nanc y F. Lewis, as truste e for the Nancy F. Le wis Trust, and Erst e Asset Man age ment GmbH

.

2 As explained below, Corporations Code section 800,

su bdivision (b)(2 ) requi res a shareholder bringing a derivativ e

ac ti on to allege “ wi th pa r ticularity ” the “ efforts [mad e] to secure from the board such action a s [the shareholder] desire s , or the reasons for not making such effort

. . . . ” F urther statut ory references are t o the Corporations Code unl ess otherwise in di ca te d

.4 II. BACKGROUND

A. Factual Background 3

Plaintiffs were stockholder s of S empra w hen the Aliso Canyon Natural Gas Storage facility (Aliso Canyon facility ) experienced a natural gas leak (Aliso gas leak)

. 4 Sem pra was a C a lifornia corporation “whose operating units invest [e d] in,
d evelop [ed] , and operate [d] en ergy infrastruc ture
, and pr ovide [d] gas and electricity services to [its ] customers in North and South
America.” One of Sempra ’s wholly

- o wned subsidiar i es , S outher n California Gas Company (SoCalGas)

, maintained t he Aliso Canyon facility

. Defendants 5 were either officer s of Se mpra or members of
the B o ard or officers o r membe rs of t he b oar d of direc tors of

3 “In this a ppea l foll owing t he s ustaining of a demurrer, we

assu me the tru th of the pr operly plea ded factual all egat ions, facts that reaso nably can be inferred from th o s e expressly plea ded and matter s of which judicial notice ha s been taken.” ( Fi e rro v . Landry’s Res taur a n t I nc. (20 19) 32 Cal.App.5t h 276, 281.)

4 See generally So uthern C a lifornia Gas L eak Cases ( 2019) 7 Cal.5th 391, 395

– 39 6

.

5 D efendants William C . Ru snack, Willi am D . Jones, Lynn S c henk, Alan L. Bo e c kmann, Jack T. Taylor, Jam es C. Y ardley, Kathlee n L

. B rown , Pablo A. F errero, D ebra L. Reed, William G. Ouch i, Jam es G. Br ocksmith, Jr ., and William P. Rutledge were

mem bers o f the Bo ard at the time of the A l iso gas le ak ( Director defe nd a nts)

. Defendants Dennis V. Arriola, J. Bret L ane, Joseph A. House hol de r , Steven D. Davis, Martha B. Wyrsch, an d Jesse J.5

S oCal Gas at the tim e of t h e Aliso gas leak

. When plaintiffs filed
the operat ive am ended comp lai nt
, eight of the 15 Board members
had also been Board members at the tim e of the lea k

. 6
The Aliso C a nyon facility wa s “the largest natural g as storage reservoir in C alifornia [,]

. . . one of the largest res er voirs
in the United States

, ” and the large st of S empra’s f ou r

u nderground natural gas sto rage facilities. The Aliso ga s leak

o c cur r ed in the gas storage well designate d SS

- 25 ( Well)

. The
Board had act ua l knowl edge of the substantial environ mental, pub l ic health, a n d economic risks posed by the Aliso Canyon facility an d the We ll. In 2000, the Board implemented a Board

- le vel com mitte e named the Environmental , He alth, Safety, and Tec hn o logy
Commit tee ( Committee)

. T he responsibilities of th e C ommittee
“include d monitorin g safety issues , including st o rage well safety

. . . .” Pursuan t to i ts cha rter, the Com mittee “ [ was] re sponsib le
fo r rev iewi ng ‘enviro nment al, health and safety laws, regulat io n s and developments at the global, national, regional a n d local level
and ev aluation of w ays to address these matters as part of Sempra’s bus i ness str ateg y and operati ons.’” Furth er , th e Co mmitt ee ’s “ focus on environmen tal , h ealth , safety and technology is sues [was] consistent w i t h the [B]oard’s oversight
role o f cor porate responsibility and stewardship.”

Knig ht, Jr . were e ither office rs of Sempr a o r SoCalGas, or direct ors of SoC a l Gas

, at the time the Ali so gas leak o ccur red.

6 The ei ght Board members r emain ing from the time o f the Aliso ga s leak w ere R u snack, Jones, Schenk, Boeckma nn, Taylor, Y ardle y , Brown, and F errero

.6 Betwee n Janua ry 2013 and O ct ober 2 015, t he Com mit tee

met 10 times an d r egularly report ed to the Board

. On June 17, 2013, the Committee members discussed among them sel ves “ ‘ SoCalG as’ [s] enviro nmental an d safety compliance man agement program , ’ ” as well as a gas dischar ge incident at t he Playa del Rey g as stora ge fa c ility

. The mem bers
al s o d is cus sed “SoCalGas ’ [s] emergency response structure,

t raini ng program, communica tion p r oc esses [,]

. . . d rills and
simul ations us ed to replicate emergency scenarios and r eviewed
lessons learned.”
The Board received “ periodic presenta tions from

mana ge ment and a ttempted to info rm itself regarding r i sks to [Sempra ] posed by poten t ial p roblems with the pipelines

. ” And, o n May 9, 2014
, at a Boa rd meeting

, the Board members
discus s ed So CalGas ’ s “ ‘st ate of the art ’ ” natural gas pipe line
safe ty e nh a ncement pro gram

. In June 2 0 14, an exe cutive attended the Board meeting and
advised the Board about several factors to be included in
SoCalGas’ s g eneral rate case p resentation to the C alifor nia
Public Utilities Comm i ssion (CPUC)

, including “cy b ers ecu rit y

p rotectio ns, en ter pri se risk management , ph ysical secur ity and
i mproved s ervice, safe ty and reliability.” At the meeting

, “ [t] he Board asked q uestions of manage ment , all of which were

an swered to its satis factio n .” The Board t hen ex pressed that
SoC alGa s should pr oceed wit h f iling a not ice o f intent f or the

g e neral rate c ase presentation with the CPUC. As part of t he general rate ca se p resentation submitted in
November 2014

, SoCalGa s sough t a rate increase for a propos ed
“Sto rage Inte grit y Managem ent Pr ogram” (SIM P) whi ch was to be implemen ted i n 2015. SoCal Gas’ s executives had iden tified7

significant det erioration of the unde rground storage wells at th e Aliso Canyo n and three other facilities

. The SIMP p ropose d that

a ll o f S oCalGas ’s active gas injecti on wells, i n cludi ng t he We ll

, be
tested i mmediately in or der to avoid unsafe condi tions or an uncontrolled fai lur e

. The S IMP anticipated that follow in g an ins pection, addit ional repairs would be recomme nded

. On December 9

, 2014, the Board receiv ed its an nual risk

m anagem ent re port , which disc ussed, amo ng other things

, “ ‘ gas infr astru cture safety and reli ability risks

. ’ ” In May 2015, a So CalGas ex ecutive updat ed the B o ard on the general rate case and “outlined SoCalGas’s focus on safety, reliability, cust ome r servic e and the es timated timefram e fo r the

rate cas e procee ding.” In Septe mber 2015, the Bo ard re ceived other general rate

c ase updates f

rom SoCalGas executi ve s who described “ the major

cos t drivers for the increases being requested by S oCalGas,
i nc luding cost s asso cia ted with maintaining and impro ving
in frastr uc t ure and safety

- rela ted an d compl ian ce programs .”
“The Boa rd asked questions” o f the SoCalGas executives, “all of
which were answered to the Board’s satisfact ion.”
The combined total of mee tin gs held by e it her th e Board or

t he Committe e be tween 2 013 and 2 0 15 wa s approxim ately 90

. On O ctober 23, 2015, SoCa lGas employees discovered the Aliso gas leak during a t wice

- daily observation of the Well

. On
Oct o ber 26, 2015, SoCalGas reporte d t he lea k to severa l

go v er nm en t agencies, inc ludi ng the Californi a Emer gency Management Agency

. The g as leak contin ued until February 18, 2 016. I n a quarterly fina ncial form submit te d to the S ecurities and E xchange Commission on November 11, 20 19,8

Se mpra disclos ed that it h ad suf fe r ed at le ast $1.1 bill ion in damages as a result of the leak

.

B

. Procedural Ba ckground

B eginning in Februar y 2016, plaintiffs filed i ndividual
share holder derivative act i ons against defendants for br each of fiduciary duty

. On A u gu st 10, 2017
, pl ain ti ffs filed a c ons ol idated
shareholder derivative complaint, alleging that defend ants
br ea ched their fiduciary duties “ by fa iling to tak e steps to

ma i ntain an ad equate inspe cti on program, documentation

, monitoring, and risk managemen t p la n to en sure saf ety a t [ the ] Aliso Canyon [ facility ] , incl udi ng [t he W e ll ] .” Plaintiffs also alleged that d efendan ts aided and ab etted the b reach of fid uciary duty. Plainti ffs did not serve a demand on the Bo ard prior to filing suit and instead a lleged th at it would be f ut il e t o do so

. Defendants demurred, an d , o n N ovember 4, 2019, the trial

court susta ined the demur rer with l eav e to amend , finding that plaintiffs failed sufficientl y t o allege that serving a demand on
the Board wou ld hav e bee n futile

. On February 5

, 20 20, p lai n tiffs filed th e op erative first

a mended complaint

. In supp ort of the breach of fiduciary duty

ca use of action, p laintiffs allege d that defendants f ailed to be
informed of “serio us sa fety iss ues at Aliso Canyon” and “eith er knew, w e re rec k less , o r we re g r ossly neg ligent in not kn owin g or

a cting upon the matters alleged . . . .” Ac cording to plaintiffs,

“ [d] e fendants comp let ely ab dicated their duty to receive
information from m anagement and regular rep orting to ens ure safety at [ the] Aliso Cany on [ fac il ity ]

, i n cluding [th e Well] in t he9

yea rs leading up to the l eak.” Plai n tiffs also alleged defend a nts ’
“re ckless ap pro ach to natural gas well safety, and their
int entional decision to not adopt and impl ement a mo dern, effective and compr ehen si v e ri sk a sse ss men t program for [ Sem pra ’s ] natural g as wells, despite knowledge of increas i ng actual physical integr ity pr oblems at th e w ell s, co nstitutes bad
faith and disl oyal cond uct . . . .” Defendants again demurred

. On D ecember 3 0, 2 020, the t rial court issu ed it s r uling sustaining the de murrers , co ncluding that plaint iffs again failed
suffi cientl y to allege demand futility

. Th e cou rt found instru ctive
In re Caremark In tern ati onal Inc. (Del. Ch. 1996) 698 A. 2 d 959 ( Carem ark ) and Marchand v. Ba rnhill (Del . 20 19 ) 2 12 A. 3d 80 5 ( Marchand ) , Delaware ca s e s invol v ing clai ms that directors failed

to exe rcise ove rsigh t

. A ccord ing to the co ur t, pla intiffs had fail ed

to state deman d f

utility u nder Marchan d , wh ich required them to ple ad fac t s demonstr atin g “an utte r fai lur e by [d] efendant s t o attempt to assur e a reasonable informat ion and r eporting system
exists .” At a subsequent hearing, pl aintiffs indicated th ey wou ld
not seek leave to ame nd. On Febru a ry 4 , 2021, th e court i ssued
th e judgment of dismi s sa l from wh ich p la in tif fs timely appe aled.

II I. DISCUSS I ON

A. Standard of Revie w

We review t h e trial court ’ s susta ining of a demurre r d e

novo. ( Blank v. Ki rwan (1985) 39 Cal.3d 311, 3 1 8. ) “In rev i ewing
the sufficie ncy o f a complaint against a gene ral demurre r, w e a re

gu ided by long

- set tled rul e s. ‘We t reat the demurrer as

a d mi tti ng all mat erial fa cts properly plead ed, but not10

conten tio ns, deduc tions or con clusi ons of fact or law. [C i tation.]
We also consi der matt ers w hich may be judicially notic ed.’ [Cita tion .] F urt her, we give the c omplain t a re aso nable interpretation, r eadin g it as a whole and its parts in the ir

contex t. [Cita tio n.] ” ( Ibi d. ) 7 “[In r uling on a demurre r , a] court generally co n fines itse lf

to t he ple ading but, as appropriate, may extend its co ns ide ration

to matters subject to judic ial notice. [Citation. ] ‘[ W]hen the alleg ations of the complain t contradict or ar e i nconsisten t with
such fact s, we accept the latter and reject th e former. [Citati ons.]’ [Citation.] We give the same prece denc e t o fac ts evident from ex hibits a ttached to the pleading. [Cita t ions .]
Efforts to show reasoni ng errors are beside the poi nt. ‘ “ Our on ly
task in revie wing a ruling on a demur re r is to det e rmine whet her
the compl aint states a cause of act ion. ” ’ [Ci tati ons .] W e do that independ entl y [c itation] , regardless of reasons stat ed by the tri al

court. [Cita tion.]” ( Hill v. Roll Inte rna t. Corp

. ( 2011) 195 Cal.Ap p.4th 1295, 1300 ( H ill )

. ) 8

7 Plaint i ffs do not argue th ere is a reasonable possibili ty t hat

a ny defec t s can be cured by ame n dment.

8 In ruling on the demurrer , the t rial court took j ud icia l notice of cert ain B o ard and C ommitte e minutes , a ruling plaintiffs do not challenge on appea l

. P l a inti ffs contend

, however, that the co urt did not just take judicial notice of t he mi nute s but assumed the tr uth of the matters a sserte d therein

. As p l ain tiff

s ’ content ion , at b ottom, is a chal lenge to the court ’ s reasoning, we need not address it

. ( Hill , supra , 19 5 Cal.App.4th at p. 1300.) In any event, because we co n d uct an independ ent revie w of the court ’ s order, we do not rel y on t he court ’ s inter p retation of the m inu tes.11

B. Shareholder s ’ D erivati ve Actions and Demand Fu tility

“ It is a f unda men ta l p rinciple of corp orate govern a nce t ha t the role of managing the business of the corporation is vested i n its board of d irect ors, not in its s h areholders. ( G rosset v. Wenaa s (2008) 4 2 Cal.4th 110 0 , 1108

. ) This responsib ility inc lu des the

prosec utio n, de fen se, and c ontrol of co r porate l itig ation. ( Ibid

. )
Judicial de ference is ac corded to directors under th e ‘ business ju d gment rule, ’ whi ch reco gnizes th at where decisions ar e wi thout fraud o r breach o f tr ust, ‘ man agement o f the cor po ra tion
is bes t le ft to th ose to who m it has bee n entrus t ed, not to the

co urts. [Cit ati on.] ’ ( Desai goudar v. Meyercord (2003) 1 08 Cal.App.4th 173, 183

. ) As codified i n section 309, the busi n ess judgment rule obl iga tes a d irec tor t o perform his or her dutie s ‘ in good fait h, in a m anner su ch dir ector be lieves to b e in the best
interests o f t he corporatio n and its shareholders and w ith suc h

care, including reasonable in qu iry, as an ordinarily p r uden t person in a lik e p osition wou ld us e under similar circumstan ces ’ (§ 309 , su bd. ( a)) ; and it insula tes a di rector from lia bility when
he or she pe rforms those obligations in the manner pr ovided in
the s tatute (§ 309, subd. (c ))

. ” ( Bader v. Anderson ( 2009 ) 179 Cal.App.4th 77 5, 787

– 788 , fn. omitted ( Bade r ) .) “This p rinciple th at t he co rpo r ation must br ing suit on it s

own be half notwithsta nding, wher e the dire cto rs fail or refuse to act, a shareholder h as a su fficient interest in the entity ‘ to justify the bringing of a “ propulsive ” act ion , desig ned to set in motion

t he judicial mach iner y f o r the redress of the wrong to the

c orporation. [Ci tations. ] ’ ( Klopstoc k v. Superior Court (1941) 17 Cal.2d 13, 16

– 17

. . . . ) ‘ [T]he co rp oration is the u ltima te be neficiary of s uch a deriv ative suit

. . . . ’ ( Id. a t p. 21

. ) A12

d erivative l awsui t is in e ssence a cons olidatio n in e quity of two suits, one by the sh areholder against the dir ectors seeking an order that they sue those who have w ronge d the corpo ration, an d
the other b y the corporation a gai nst the wr ongdoers. ( Daily
Inc ome Fund, I

nc. v . Fo x ( 19 84) 464 U.S. 523, 529 , fn. 4 .) A

pr esuit demand on the dire ctors, however, is ordina rily required for the bringing of a derivati ve action. ” ( B ader

, supra , 1 79 Cal.Ap p.4t h at pp. 788

– 789.)

“ T his requir ement that a shareholder est ablish that he o r sh e m ade a ‘ “ suitabl e deman d, unles s ex cuse d by extraordinary

c ondi tions

. . . ” [citation] ’ ( Kamen v. Kemper Financial Services,
Inc. (1991) 5 00 U.S. 90, 96 ( Kamen ) ), ‘ “ is to e n cou rage intracorporat e re s oluti on of dispu tes and to protec t the

manager ial f

reed om of tho se to wh om the r esponsib ilit y of running the business is delegated

. . . . ” ’ ( Shields v . Singleton (1993) 15 Ca l.App.4th 1611, 1 619 ( Shiel ds ).) T he demand

re q uirement is also inte nded t o pr event the a buse of the
derivative su it r emedy. ( K amen , [ su

pra , 500 U.S. ] at pp. 95

– 96 .)

. . . California ’ s demand re quirement under section

800 [, subd ivision ] (b )(2) is similar t o the federal ru le and requires
that the plaintiff in a sh areh ol der derivative suit ‘ allege[ ] in the complai nt wi t h partic ul ar ity p lai ntiff ’ s e fforts t o secure from the
board such action as pla intiff desires, or the reasons for not making such effort, and allege[ ] furth er that plainti ff ha s either
informed the corp or atio n or the bo ard i n writing of the ultimate
fac t s of each c au se of ac t ion agai nst each defendant or del i vered to the corporat ion or the board a true copy of the c omplaint wh ich plaintiff pro poses to file. ’ ” ( Bade r , supra , 179 Cal.App.4th at

p p. 78 9

– 79 0. )13 “ ‘ Although “

juris dictions differ widely in def i n ing the

c i r cumstan ce s under wh ich dem and on directors w ill be excused, ” [cit ati on], demand typically is deemed fu tile when a majority of
the d irectors have p articip ated in or ap p roved the allege d

wro ngdo ing , [ citation], or ar e otherwise financially i nter e s ted in
th e challen ge d transact ions, [ citation]. ’ ( Kam e n , supra , 500 U.S.

at pp . 101

– 102 , fn. omitted.) . . . [G ] ive n the requirement under
section 8 00 [, su bdivision ] (b ) ( 2) that allegations be m ade ‘ w ith partic ularity, ’ it is clear that general a v erme nts tha t th e dir ecto rs

wer e invol ved in a conspiracy or a ided and abetted the w ro ngful acts complained of will not s uffi ce to show demand futility. ( Shi elds

, s upra , 15 Cal. A p p.4th at p. 1621 .) Li k ewise, a g eneral
cl aim that th ere is nationwid e struct ural bi as com mo n to

cor p ora te boards will not excuse the mak i ng of a demand before
br inging a derivative suit. ( Oakl and Raiders v. Nat ional Football League (2001) 93 Cal

. App.4th 572, 587 [ ( Oak lan d Rai ders ) ] .)
Rath er, ‘ the court mu st be appr ised of fact s spec ifi c to eac h
directo r f

rom which it can conclude that th a t particular direc tor

co uld or could not be expect ed to fai rly evalu ate the claims of the shareholder p l aintiff. ’ ( Sh ields

, [ supra , 15 Cal. App.4 th] at

p. 1622 .) Thus, th e c ourt, in rev iewing th e al leg ati ons t o support de mand futility, must be able to de t ermine on a direct or

- by

director basis whet her or not each po ssesses indepen dence o r disinterest such t hat he or she m ay fair ly evaluate t he challe nged
transaction. ( Oakl and Raiders [

, su pra , 93 C al. App .4t h] at

p

. 587 .) ” ( Bader

, supra , 179 Cal.App.4th at p. 7 90.)

“ Califor nia co urts commonl y look to two test s enu nciated by
the Del aware Supreme Court for de terminin g the a dequ acy of the pleadin g of demand futility. Where a decision of the bo ard o f
di r ect ors is c h allenged in the derivative suit, the Aronson test14

asks ‘ whether , unde r the partic ularized facts all eged, a

reasona ble doub t is created t hat: (1) th e direct ors are dis interested and ind epe ndent [or] (2) the challe nge d transac tion

was other wise the pr oduct of a val id exercise of business judgment. ’ (

Aronson v. Lewis ( Del. 1 984) 473 A.2 d 805, 814 ( Aronso n ); a ccord Bade r , supra , 179 Cal.App. 4 th at p. 79 1 ; Oakla nd Ra id ers [

, su

pra ,] 93 Cal.A pp.4th [ at p. ] 587

. . . ) But
whe re ‘ the b oard tha t w ould be conside r i ng the d ema nd did not
make a business decisio n which is being challen g ed i n the
derivative s uit ’ ( Rales v. Blas band (Del. 1993) 6 3 4 A.2d 927, 933

– 934 ( Rale s )) , t he Rales t est asks whether ‘ the particularized
factual all egat ions of a der iva tive stockholde r complain t c reate a

re asonable doubt that, as of the time the complain t is filed, the
board o f directors cou ld h ave p roperly exerc i sed its independent
and d i si nte rested bu s iness judgment in res ponding to a de mand.
If th e de rivat ive plai nti ff s a tisfies th i s burden, th en demand will
be excused as futil e ’ ( Rales

, supra , [634 A .2d ] at p. 934; accor d
Bader

, supra , [17 9 Cal .App.4 t h] at p p. 791

– 792 [s ummariz ing
R ales ] )

. ” (

Appl e Inc. v. Superior Cou rt (2017) 1 8 Cal.App.5th 222, 233, fn. omi tted (

A pple ) .) 9 H er e, t h e parti es agree that the Rales test applies to plaintiffs ’ allegatio n of demand futil ity

.

9 Aronso n was ov err ule d on another point not relevant her e. ( Brehm v. Eisner (Del. 200 0) 74 6 A.2d 244, 254

– 255.) The De l aware Supreme Court re c e ntly co mbined t he Rale s and Ar onson tests. ( U nited Food & Co m mer ci al Worke rs Union v. Zuckerberg (De l. 2021) 262 A.3d 1038, 1 058 ; s ee Tola v. Bryant (2022) 76 Cal.App .5th 746, 752

. )15

C

. Substanti al Likeli hood of Liabi l ity

1

. A pplicabili ty of C are ma rk Stand ard in California

Under the Rales tes t, “[d] irectorial inte re s t

. . . ex i sts where

a corpora te decision will have a materially de trime ntal impact on a director, b ut not on th e co rporation and t he stockh o l ders. In

s u ch c ircumstances, a direct or ca nnot be expected to exe rc ise his or her indepe ndent business judgmen t w itho u t bei n g influenc e d by the ad verse personal consequences result ing f rom the
decision. ” ( Rales

, supra , 634 A .2d at p. 936.) 10 D irectors are not impar t ial or disintereste d if th ey fa ce a “ ‘ “ substantial l ik elihood”’”
of personal liability. ( See Apple

, supra , 18 C a l.App. 5th a t p. 256 ; B ader

, supra , 1 79 Cal.App.4 th at p. 798; see also Rales

, supra , 63 4 A.2d at p. 9 36 ; Arons on , supra , 4 73 A.2d at p. 815 .)
Under Delawar e law, “ Caremark articulat es the necessar y cond itions for as sessing director oversight l iab ili ty. ” ( Stone v.
R itter (2 006 ) 911 A. 2 d 3 62
, 365 , fn. omitted ( Stone ) .) “ [T] he stockholders must allege ‘ that a director acted inconsistent wi th his fiduciary duties and, most i mportantly, that th e dir ector knew
he w as so acting. ’ This is because a Car ema rk cl ai m ‘ is roo t ed in

co nce pts of bad fai th; ind eed, a showin g of bad faith is a necessary condition to direct or oversi ght liability. ’

. . . Because of the
difficulties in pr oving bad faith director action, a Carem ark claim

10 Plaintiffs d o no t allege that a demand woul d have been fut ile becaus e a director ( 1) received a n improp er bene fit or ( 2) lacked ind ep ende nce bec ause t he d irector was behol den to a n interested dir ector
, officer , or controlling shareholder . (See Bader

, supr a , 179 Cal.App.4th at p. 792 ; Rales

, supra , 634 A.2d at p. 936 .)16

is ‘ possibly the most difficu lt th eo ry in cor p oration law upon which a plai ntif

f mig ht hope to w in a judgment

. ’ ” ( City of Birmingham Retirement and R elief System v. Good ( Del. 2017)
177 A.3d 47 , 55 , fn s

. om it ted .)
Plaintiffs con cede t hat under bot h Californ ia and Del aware law

, a sub stant ial likel ih o od o f li abi lity is a grou nd fo r f in ding
that a dir ector is partial or interested

. They c ontend, however,
that whether directors face a substant ia l likelihood of liabili ty is

“ a question o f substant ive law, ” governe d by California l aw , wh i ch ma terially di f

fers fro m t he l a w of Del a ware

. In their view

, the trial court therefore erre d in fol lowing Caremar k and its

pro geny

.

a

. L imitations on D irect or L ia bility

Ac cord i ng to pl aintiffs

, in California, unlike in Delaw are, directors have a du ty o f “ re aso nabl e inquiry

, ” as set forth in section 309, subdi vision ( a) . That sec tion req uires , among o t her things, that a director enga ge in “ reasonable inquiry , as an ordinarily p r udent pe rson in a like position wo uld use under
simil ar circumsta nce s

. ” Acco rding to pl aintiffs, th e trial court
erred by relying on D elawar e law and fail ing to apply sect ion 309,
sub divi si on (a)

. W e disagree.
Althou gh section 30 9
, subdivi sion (a ) describes the genera l
dut y of d irect ors, it do es not a d dress the q uesti on at issue here,
that is, whet her these D irecto r defendants face d a subst antial
like lihood of personal l ia bility for their conduct

. And, o n this questi on, Californi a c orporat io ns ma y elect to limit director
l iabili ty

. ( § 204.5, subd. (a ) .)17 Sp ec i fically

, s ection 2 04, subdivi sion (a)( 10) pro vides

, in pertinen t part
, tha t articles of incorporation may set forth :

“ P rovisions e li m inat ing or limit ing the per sonal liability o f a
di rector for monetary damages in an acti on b ro u ght by or in the right o f t h e corp oration for breach of a directo r ’ s dut ies to the corporation and it s shareholders, as set forth in Section 309,

p rovided, ho we v er, that (A) suc h a provisi on may not elimin ate or limit the liability of directors (i) for ac t s or omissions th at invo lve
intent ional misco nduct or a knowing a nd c ulp able violation of law, (ii) f

o r acts or omissions that a director believes to be

contr ar y to the best int eres ts of t he corporation or its

s hareholders or that involve the a bsenc e of g o od faith on the p art of the direct or, (iii) f

or any tran saction f

rom whi ch a director derived an impr o p er personal benefit, (iv) for acts or omissi ons that sh ow a re ckless disre gard for th e director ’ s duty to th e corporation or its shareholders in c ircu ms t ances in which th e direc tor was aw are, or sho uld have be en aware, in the ordinary course of performin g a director ’ s duties, of a risk of serious in jury
to the c o rpor ation or its sha reholde rs, (v) for acts or omi ssions
that constitute an unexcus ed pa tter n o f inattention tha t amoun ts

t o an a bdication o f the direc tor ’ s dut y t o th e corporation or its
sharehol d e rs

. . . .” (§ 204, subd. (a)(10).) Here, Sempra ’ s arti c les of inco rpora tion provi de : “ The liability of t he directors of the C orporation for mo n etar y damages
shall be elimina ted to th e fulles t ex tent under Calif orni a l aw. ” Sempra the refore adopte d the limiting provisions for director
lia bility set fo rth at section 204, subdivisio n (a)(1 0 )

. (§ 2 0 4

. 5,

su bd. (a)

. )
Plaintiffs do not all ege t ha t de fe ndants engaged i n intent ional mis conduct or knowi n g violation s of the l aw . Nor do18

they allege that de fenda nts derived an im proper benefit from a transactio n. Inst ead, p laintiffs allege that d efendants engaged in
acts or omi ssion s that : show a reck less disregard of a di rector’s
duties t o the corporatio n or shareho lder s ( § 204 , subd. (a) (10)(iv) )

an d constitu t e an unexcused pa ttern of inatt ent ion that amo unt s
to an abdication of duty (§ 204, s ubd. (a)(10)( v) )

. “ W here, a s h er e, there is no published Ca l ifo rnia decis ion th at addre sses the precise issu e be f

ore us, out

- of

- state de cisions may provide ‘ useful guida n ce

. ’ ” ( Jackson v. Superior Court (2018 ) 25 Ca l .App.5th 515, 532, fn. 11 .) Cal ifo r ni a courts have routinely relied “o n

corp orate law develope d in t h e S tate of Dela w are give n that i t is
identical to California corporate la w for all practical purposes.” ( O akland Raiders

, supra , 93 Cal.App.4th a t p. 58 6 , fn. 5; acco rd, Ap ple

, su pra , 1 8 Cal. App.5th at p. 244, fn. 9 .) Thu s, we next consider whethe r t he d efinitions o f di rector l i ability set forth at

se c t ion 204, su bdivision s ( a)(10)(iv) and (a)(10) (v ) are con s istent
with Carem ark and its proge ny.

b

. R e ckless D i sregard of D uties

The Corpor ati ons Code does not define the term “ reckless disreg ard. ” We t herefore c onstru e that t erm in a cc ordance with
it s ordinary l egal mean ing

. (Civ. Code, § 13 ; Brown v. Sup e rior
Court (2016) 63 Cal.4th 335, 351 [ “ It is a ve nerabl e principle that
when a word or ph rase appearing in a statut e ‘ has a well

established leg al m eaning, it will be giv en that me a ning in
construi n g the statu te ’”] .) “ Re c kless disregard ” is a “[c] onscio u s indifference to the consequence s of a n ac t” o r “ [t] he intentional
commission of a h armfu l act or failure to do a r e quired act when
the actor kn ow s or has rea son to know of facts t h at would lead a19

r easonable p erso n to rea lize that the actor ’ s conduct bot h creates an unreasonable risk of harm t o someo n e a nd inv olves a high degree of probab ility that substantial harm wil l result .” (Black’s
Law D ict

. (1 1th ed. 20 19).) Apply in g th is d efinition , we con c lude that a director ac ts with “ reckless dis reg ard ” of h i s duties , within the meanin g of

s ection 204, s u bdivision (a)(10)(iv) when the direct or ( 1) does an
intentional act o r intentiona lly fail s to act i n accordance with

t hose du t i es , (2 ) with knowledge

, o r with reas on to hav e k nowled ge, that ( 3) the director’ s conduct creates a sub stantia l
risk of serious harm to t he corporation or its s hareho lders.
Sim ilarly, i n Dela ware, a n “inten tional derelicti on of d uty, a conscious disregar d for o ne’s responsibilit i e s” is akin to “ acts or omissions not in good faith ” ( Bre hm v. Eisner ( I n re Walt Disney
Co. Deri va tive Litig ation ) (De l . 2006) 90 6 A.2d 27

, 65

– 66 ( Walt
Di s ney ) )

, and th er efore Caremark is c onsistent wi th section 2 0 4,

s ubd ivision ( a)(1 0 )(iv)

. C ontrary to pl aint iffs ’ contenti on , supported b y their citation to an unpub lished Court o f Chancery opinion ( M

cElrath v. K

alanick (D el. Ch. Apr. 1 , 2019) 2 019 Del.
Ch. LEXIS 107 , * 28 )

, Delaware ca s e a uthority does not excl ude
from liabili ty a director ’s reckless di sre gard of his or h er d uti es

. ( See W alt Disney

, supra , 906 A.2d a t p. 67, fn. 11 1 [ transaction
that results from a direc tor ’ s “ ‘ re ckless indiffe rence to or a d elib er ate dis regard of the inte r ests of the whole bod y of
stockholder s ’ ” requires further judici al scr u tiny fo r bad fai th

co ndu ct ]

. )20 c

. U nexcused I nat t ention A mountin g to A bdicati on of D uty

We next c onsider th e meaning of the term “ abd ication of
du ty ” as set forth in sec tion 204, su bdiv i sion ( a)(10)( v)

. Ag ain,
the C o rporations C ode provides no definiti on

. 11 T hus, we a gain

app l y the plain and ordin a ry meaning of th e word. (Civ. Code, § 13.) “Abdication” i s “[ t] he act o f renouncing or abandon ing

pr iv ileges or dutie s.” (Black’s Law Dict

. (11th ed. 20 19). ) The act

o f ren ouncing or aband oning on e’s dutie s re qui res an in tentiona l decision because, in order to r enounc e or abandon it , one must be
aware of th e duty owed in th e first instance

. (See Del G iorgio v.
Powers (1938) 27 Cal.App.2d 6 6 8, 680 [ “ ther e ca n be no
aban do nmen t without an i ntentio n to abando n”]

. )
De la war e deems “ t he intention [ al ] fail [ u re ] to act in th e face of a known duty to act ” as “ describ [ ing ] , and [bei ng ] fully
consistent wi th

, th e lack of good faith conduct that the Ca remark

court held was a ‘ nece ssary condition ’ fo r direct or oversigh t

11 P l aintiff

s cite Gaillard v. Natomas Co. (198 9 ) 208 C al.App.3d 1 250 ( G aillar d ) , to ar gu e t hat a d i rector ’s abdic a tion

o f duties is a vi olation of the busines s ju dgment rule a nd the

reasona ble inq uiry du ty und er section 3 09. T he Court of Appe a l held, “Notwith standing the deference to a directo r ’ s business jud gment, t he rule does not imm u nize a director from lia bilit y in the case of his or her ab di ca tion of corpo rate responsib ilities

. . . .” ( G aillard, supra , 208 Ca l.App.3 d at p. 126 3.) Plain tiff s’ assertion is correct that a d irector ’ s abdic ation of corpora te du ty vi olates
sect ion 309. Ga il lard , however, doe s no t discuss the meaning of “abdicat io n of duty” in the context o f secti on 204, subdi vision (a)(10)(v), and thus d oes not assis t in int erpreting t he te rm. ( B.B. v. County of Los Angeles (20 20) 10 Cal.5 th 1, 11 [ “ ‘ “cas e s are not

au thor it y f

o r propositi ons not c o nsider ed”’”].)21

li ability , i .e ., ‘ a sustain ed or systematic f ailure of the boa rd to exercise oversight

— such as an utter fail u re to atte mpt to assure

a reasona ble in formati on and reporting sy stem exists .

. . . ’ ” ( St one , supra , 911 A. 2d at p. 36 9 , fn. omitted .) A n “ int ent i on [ al ]
fail [ ure ] to act in the face of a kn own duty to act ” expresses the

sam e concept as an “ unex cused pattern of i nattent ion that

am ounts to an ab dication of th e direc tor ’ s duty

. ” Ac cordingly, th e Caremark stand ard is consistent with sectio n 20 4, su bd iv isi on ( a)(1 0 )(v).

2. Application of Carem ark

Having foun d that Delaware co rporation law prov ides useful guidance to the issues pres ented here, we now addr ess plaint iffs’ al ternative argument tha t they have alle g ed a

s ubstantial likelihood o f liabi l ity u nde r C ar ema rk against the
Director de fenda nts. “B ad faith is established, under C aremark , when ‘ the directors [co mplet ely] fail[ ] t o impleme nt any rep orting o r informat ion s ystem or controls[,] o r

. . . having implemented such a system o r co n t rols

, consc iously fail[ ] to moni tor o r oversee i ts

ope rations thus di sab ling themselves from being informed of risks or prob lems requiring thei r attenti on. ’ In s hort, to satisfy

t heir duty of loyalty, direc t o rs mus t make a good fait h eff ort to impl ement an o ve rsight system and then moni tor i t

. ” ( March and

, s upra , 212 A.3d at p. 821, fn. omitted

. )
Pl aintiffs con tend that they have alleg ed conduc t similar to
th at a t issue in Marchan d

, supra , 212 A.3d 805

. In Marchand,
nominal defendant Blu e Bell produced one pr oduct, ice cr eam

. ( Id. at p

. 809.) Over a five

- yea r p eriod , federal and state22

r egulators c ited sever al of B lu e Bell’s fa ct ories fo r food safety
violations. ( Id. at pp. 811

– 812.) A n d, o v er a t wo

- year period, the

compan y’s own inspe ctors and regul ator s f ound l isteria in

m ultiple factories across severa l s tates. ( Id. at pp. 813

– 815.)
Blue Bell ’ s ice cream even tu ally becam e c ontamina ted with
l iste ria , resul ting in a complete recall and the initi ati on o f a federal investi gation. ( Id. at pp. 814

– 815

. )
Aft er rev iew ing Blu e Bell’s books and records

, the p lai ntiff,
a Blue Bell stockholde r, sued the company’s b oard fo r failing,

un der C are mark , to imple ment any r epor ting system and failing

to be infor m ed about Blue Bell’s fo od safety compl iance. ( Marcha n d

, sup ra , 21 2 A.3d a t p p

. 815

– 816.) The Court of
Chan c ery gran ted Blue Bell’s motion to d ismiss. ( Id

. at p. 816. )
The Del aw are S upreme Co urt revers ed , findi ng the pla intiff had alleged bad fai th cond uct by the bo a rd: “no board committe e that
addresse d food s a fety exist ed ” ; “n o regular process or protocols that req uired man agement to keep the board a pprised of foo d safety co mp lia nc e practic es, risks, o r repor ts existed ”; “no
schedule for the bo ard to consider on a regular basis, such as quarterly or bi a n nually

, any key f oo d saf ety risks existed”; “during a k ey perio d leading up to the deaths of three customers,

man agement rec ei ved r eports th at c ontain ed what c oul d be

co nsidered red, or at least yellow, flags, and t h e board minutes of
the relevant period r eveale d no e viden ce that these wer e disclosed to the bo ard”; “t he board was given certain favorable
information a bout food s af ety b y managem ent, but w as not gi ven import ant reports that presented a much different pi c ture”; and
“the board m eetings are dev o i d of a n y sug gesti on that there was any regular discussi on of fo od safety issues.” ( Id. at p. 822.)23 Here, the judici ally

- no ticed B oard minut es demonst r ate the

ex istence of some oversight by the Board o ver SoCalGas’ s g as storage infrastruc ture. For exam p l e, the De cem ber 201 4 Boa rd
minutes reflect that the Boa rd rece ived an an nual risk management report regarding, among other t hings

, “ ‘ gas infr astr ucture s afety and reliability risks. ’ ” Ad di tionally, in 2000, Sempra formed t he Committee , wh ich was obliga te d t o moni tor well s a fety a nd conducted 10 meetings from January 2013 to
October 2015. Th e C ommi ttee also reported to the Board on a gas discharge a t the Playa de l Re y storage facility.
Plaintiffs , howe ver, asser t that the Board minu tes faile d to
demonst r ate that defe ndants discu ssed gas storag e infrast ructur e , as compared to pipeline in frastructu re, and argue
that all reasonable in ferences should b e construed in their favor.
Pl aintiffs also di spute whe ther the Boa rd was aw are of the

p urpos e of the genera l r ate ca se p resenta tion and t he SI M P

. At bottom, p l ain tiff

s ’ al legations challenge the effi cac y of the
monitori ng sys tem in place a n d “ gen eral averments that t he
directors were involved . . . in a cons pira cy or aided and abetted

t he wrongf

ul acts complai ne d of wi ll n ot suff ice t o show demand futility

. ” ( B a de r, supra , 1 79 Cal.A pp.4th at p. 7 90.) Such allegations do not constitut e particularized facts that create a reasonabl e doubt as to whether the Dir ector defendants here face

a substanti al likelihood o f l iabi li ty f or, in this case, intentionally
ab ando ni ng o r abdicati ng their duties t o monitor

. “[O] ur focus here is on the key i ssue of w hether [plaintiffs have] pled facts
from which we can inf er that [th e] board made no ef fort to put in

p lace a board

- le ve l compl ia nc e syste m. T hat is, we are not

exa mini ng th e e ffective ness of a board

- le vel comp liance and reporting system after th e fact. Rather, we ar e focusing on24

whether t he complaint pleads f acts sup por ti ng a reasonable
i nferenc e that th e board did not u n dertak e go od fait h eff orts to put a board

- le vel sy ste m o f monito ring and report ing in plac e. ” ( Marchand

, supra , 212 A.3d at p . 821.)
As alle ged, and contrary to plaintif fs ’ allegations that there

wa s no report ing mechanism in place for s afety issues r eg a rding

gas stor age , t he Board formed the Committee, wh i ch p rovided

r egul ar repor ts to the B oard, an d whos e purpose included, among other things

, monito ring SoCalGas’ s stora ge infras tructure for safety. Ad ditionally, t he Boa rd received annual risk

mana ge me n t repo rt s

. The B oard also approved SoCalGas’ s noti ce o f intent to fil e a ge neral rat e cas e and recei ved update s regarding it

. And, the ge neral ra te case presentation i n cluded a
rate increase for the SIMP in order to in vestigate potential well integri t y i ssues

. In sh ort
, pla i ntiffs have n ot alleged parti cu la rize d facts supportin g their C arema rk theor y o f liability,
and thus ha ve failed to p lead dem and futility as requi r e d under section 800, subdivisi o n (b) (2).

D

. The F

azio Action

Plaintiffs also as ser t an a ltern a tive theory of demand futility, argu ing th at the Board ’ s response to a demand m ade by a shareholder prior to filing an individua l derivative actio n against
the B oard (the Fazio actio n ) dem onstrate s that any demand that they would have made o n th e B oard w o uld ha ve bee n me t with a
similar r espons e and would therefor e hav e been futile. We disagree.25 1

. Backg round

On A pril 1 3 , 20 16
, Charles Fazio, another Se mpra shareholder, s ubmitted a demand that the Board pursue clai ms against certain di r e c t ors an d off icers for al lege d breaches of
fidu ciary d u ty based on their con d u ct prior to an d du ring the Aliso gas leak

. On J un e 24, 2016, the Board cr eat ed a d emand

r eview c ommittee to investigate an d make recom menda tions
about what , if any, action s to tak e in r espon se. O n M a rc h 1, 2017, F azio filed a shar e h older derivative

ac tion against the Board

. On Novemb er 4, 20 19, the trial court s ustained defendants’
demurr er to th e Fa zio ac tion with le ave to amend

. Th e court

c oncluded t ha t Fazio failed to alle g e facts sh owi n g his deman d
had been refused beca use th e Bo a rd n eede d mor e t ime to analyze
the demand due , in part, to t he comple xi ty of the l itigat ion

p ending against Sempr a an d SoCa lGas.
O n June 2 3, 2022, w hile t hi s appeal wa s pending, Fazi o filed an am e nd ed com plain t a lle g ing t hat he had received a
deman d ref

usal fr om the d emand r evi e w c ommittee

. On
Novemb er 30
, 2022, t he trial co urt sustained Sempra’s demurre r
to Fa zio’s amend ed complain t w ithout le ave to a mend. 12

2. Anal ysis

Pl aint iffs c ontend t ha t th ey su ffici ently a lle ge d demand futility beca use the Boar d, by fail ing to act on Fazio ’ s d e ma nd,

12 We judiciall y notice Fazio ’ s amended comp laint a nd the trial court ’ s orde r sustaining Semp ra ’ s d emurrer. (E v id. Code, § 452, s ubd. (d).)26

demonstrated that any simil ar demand made by pla int iffs would
have been futile.
As not e d

, whi le this appeal was pendin g, the Board a cted
on Fa zio ’s deman d and re fused it

. Thu s, pla intiffs ’ contention
tha t the Board fa iled to act on F azio ’ s de man d is now moot. ( Associat ion of Irritated Re sidents v. Department of Conservation (20 17) 11 Cal.App.5th 1202, 1221

– 12 22.) M oreover, the Board ’ s

eve n tual ref

usal o f the F azio dema n d doe s not, b y itself,
d em onstrate that any de mand woul d hav e been fu tile. At best,
the eventual refusal of Fazio ’s demand made it more probable
that the Board would hav e also re f use d pla intiffs ’ dem and. But it
d oes not de m onstrate that it wou ld have be en fut ile fo r plaintiffs

t o make such a d emand

. ( Rales

, s upra , 634 A.2d at pp. 93 3

– 9 34 .)
A ccordingly, th e cas es cited in p lai nt iff s ’ brief that address when

a c ompl ain t sufficien tly alle ge s th at a plaintiff has filed a dem and that a b oard o f d i rec tor s ha s refu sed ( s ee Rich ex rel. Fuqi Int ’

l, I nc. v. Y u Kwai Chong ( Del. Ch. 2013) 66 A.3d 9 63
, 977; Thorpe v

. CE

RBCO , Inc. (Del. Ch. 1991) 611 A.2d 5

, 11 ) are inapp o s ite

. And, for the reason s w e d iscuss above, plaintiffs ’ allegations do not ot he rwis e suffi cie ntly a llege a sub st ant ial
li ke lihood of d i rector liability

.27 IV. DIS PO SITION

The judgment o f dismissal i s affirm ed. Defendant s are entitl ed to costs on appe al

.

CERTIFIED FOR PUBLICATION

KIM

, J

.

I concur:

MOOR, J.Kanter et al. v. Re ed et al.

– B312129

RUBIN, P. J.

– Dissenting:

I respectfully dissent. The majority agrees that , at the time the plaintiffs filed the operative complaint, eight of the fifteen board members

– a majority

– had been on the Board at the time of the gas le ak. (Maj. Opn. at p. 5 & fn. 6.) The issue presented by this appeal, simply, is whether plaintiffs have alleged facts sufficient to raise

a reasonable doubt that the Board could have properl y exercised its independent and disinterested business judgment in responding to a demand that it authorize a corporate suit against, among others, a majority of its current members. ( Rales
v. Blasband (Del. 1993) 634 A.2d 927, 934.) This, in turn, depends on whether the majority of board members

, who had
been on the board at the time of the leak, face a substantial likelihood of personal liability in the action. ( Id. at p. 936.) In this way, the “futility” requirement turns into an
evaluation of the merits of the action. I f the action has merit , the
individual def

endants face a substantial likelihood of personal liability, and the futility requirement is satisfied. That brings me

to In re Caremark Int ernationa l ( D el. Ch. 1996) 698 A.2d 959

, 9 69

– 970 ( Caremark ) , which acknowledged a cause of acti on for
director liab ility for failure to be reasonably informed concerning the corporation ; and Marchand v. Barnhill (Del. 2019) 212 A.3d 805 ( Marchand ) , which explained the standard for a Caremark
claim

. The majority agrees that the Marchand test applies: “Bad
faith is est ablished, under Caremark , when ‘the directors2

[completely] fail[ ] to implement any reporting or information system or controls[,] or .

. . having implemented such a system or controls, consciously fail[ ] to monitor or ove rsee its operations
thus disablin g themselves from being informed of risks or problems requiring their attention.’ In short, to satisfy their duty of loyalty, directors must make a good faith effort to implement an oversight system and then monitor it.” ( Marchand, supra

, 212 A.3d at p. 821, fn. omitted.) Bearing in mind that the case is only at the pleading stage, I believe we need consider only the first alternative

– complete failure to implement any reporting or information system or
controls. In the ir operative complaint, plaintiff s repeatedly allege
that the Board members “completely failed to adopt and implement a b oard

- level reporting system with respect to the company’ s underground storage wells.” Although somewhat conclusory, the complaint goes on to flesh out the details. Fo r example, plaintiffs allege that SoCalGas Storage Engineering
M a nager James Mansdorfer repeatedly warned management regarding safety concerns , but “[t]here was no mechanism for reporting [his] safety concerns and remediation recommendations
to the Board.” Plaintiff s further allege that, in 2013, leaks were discovered in two wells at Aliso Canyon

. Although individuals at
SoCalGas were concerned that capital well work repairs were
behind schedule , resulting in multiple wells with “ ‘some type of well integ rity issue,’ ” there is no indication that any of the Board directors “learned about, discussed, or inquired about, those two 2013 leaks or the maintenance issues and safety work backlog raised by management a nd a senior storage engineer. There is
no indi cation that those Director Defendants had any sy s tem or reporting mechanism for learning about these two leaks or the3

safety concerns of senior knowledgeable corporate personnel .

. . .” Plaintiffs allege tha t , as to above

- ground gas transmission pipeline s , the Board received periodic presentations from management regarding risks ; but, when it came to underground storage wells

, “ t he Board received no reports, failed to inform itself about the risks posed by the wells, and failed to discuss any germane matt ers regarding gas storage at Board meetings.”
A ccording to plaintiffs, Board and C ommittee minutes
revealed “that the Board an d the [ Committee ] periodically discussed safety issues relating to pipeline safety (as opposed to well safety).” There was only one mention of gas storage wells

– following a discharge at the Playa del Rey SoCalGas storage facility. This , according to pl aintiffs, reflect s “the failure to adopt or implement any Board

- level reporting process regarding the significant risks posed by the Company’s underground storage
wells

. . . .”
Defendants ’ demurrer argued that the Board did, in fact, discuss safety of g as storage practices, relying on (1) an excerpt from December 8

- 9, 2014 Board minutes reflecting a discussion of

“ ‘gas infrastruc ture safety and reliability ris ks’ ” in the context of Sempra’s “ ‘overall risk management philosophy ’ ” ; (2) June 17,
2013 minutes of the Committee meeting which discussed

“ ‘emergency response practices’ ” following the “gas storage
incident” at Playa de l Rey ; and (3) the operative complaint’s reference to the Board’s awareness of a May 2, 2014 Aliso Canyon Safety Plan. As to the first, the December 8

- 9, 2014 Board meeting minutes show the relevant discussion under the heading, “Annual Risk Management Re port.” Kathryn Collier

, identified only as a representative of Sempra , “described various risks4

facing [Sempra] including regulatory environment and political
risk s , gas infrastructure safety and reliability risks, electric
infra structure safety and relia bility risks, cybersecurity, infrastructure project execution and empl oyee/customer safety and workplace violence. She discussed the nature of these risks and the ways [Sempra] mitigates such risks. ” Th ere is no indication that this brief mention of “gas in f rastructure safety” specifically addressed SoCalGas’s underground well storage, or
that the Board expected Sempra’s “Annual Risk Management Report” to do so. As to the second, the June 17, 2013 Committee meeting
minutes reflect the relevant discussion under the heading of “Environmental, Worker Safety, Pipeline Integri ty and Emergency Response Programs,” and the subheading
“SoCalGas

. ” As part of its report, SoCalGas discussed its “environmental and safety compliance management program ,” with specific mention of “certain occurrences during the prior year, including a ga s discharge incident at SoCalGas’s Playa del Rey storage facility, and discussed corrective actions taken by management in response to thos e occurrences .” In addition

, SoCalGas reported on its “gas system safety and pipeline integrity management program and its pipeline safety plan

. [SoCalGas] noted that the safety plan included more than ten individual plans and discussed safety values and principles that are incorporated into each plan . The report included assessments of how technology is being used to create additional safeguards.” While these minutes specifically mention the gas discharge at Playa del Rey, safety plans in general and pipeline integrity in particular, they make no sp ecific mention of gas well storage integrity, and therefore do not establish that the Board, through5

the C ommittee, had a reporting system by which it was aware of the safety risks presented by SoCalGas’s gas storage wells

. As to the third, plaintiffs ’ co mplain t alleged that the May 2014 Aliso Canyon Safety Plan “did not call for the involvement of any senior Company executives in the safety plan, and instead ensconced an electrical engineer as the lead member of the Aliso Canyon Safety Committee. The mai n purp ose of the safety plan
seems to have been to ‘meet the nee d s of the high fire dangers
and un iq ue conditions of Aliso Canyon’ and thus primarily addresses fire hazards at Aliso Canyon. The safety plan, while lengthy, mostly encouraged employees to pa y lip service to safety by always ‘dress[ing] appropriately for work [and] perform[ing] the circle of safety.’ The safety plan, while well

- intentioned, did absolutely nothing to address the infrastructu r e problems and lack of functioning safety valves and o ther problems at Aliso Canyon. Fur th er, while the safety plan purports to incorporate storage policies and procedures, these reference d policies either
did not address the infrast r ucture problems at Aliso Canyon or were not monitored or implemented to e ns ure safety at Aliso Canyon.” Plaintiffs allege this was nothing more than a “feel good” safety plan intended to provide only “an appearance of safety preparation.” This, too, fails to establish a Board

- level

rep orting plan regarding the safety risks of u nderground gas storage wells

. 1

1 Defendants also rely on proceedings before the CPUC where in SoCalGas sought a rate hike to addr ess the safety risks posed by the storage wells at Aliso Canyon. But plaintiffs allege that defendants did not review the testimony of SoCalGas prior to its submission to the CPUC , and the Board did not make itself aware of the specific safety risks encom passed in SoCalGas’s request for a rate hike. Knowing broadly that SoCalGas sought a6 In short, plaintiffs’ complaint paints a picture of a Board
that had its head in the sand about the danger of SoCalGas’s
wells in the ground . Individuals who were aware of the dangers were repeatedly sounding the alarm be l l, but there was no means
for the Board to hear it . In response to these allegations, the Board combed through the minutes of its own meetings and those
of the C ommittee, only to find references to infrastructure safety
that are , at best, ambiguous as to whether they encompassed underground storage well s. The majority sees this as a n irrelevant difference of degree

– concluding that the Board had “some” oversight over gas storage infrastructure, which it holds is sufficient under
Marchand

. (Maj. Opn., p p

. 2 2

– 23 .) I do not share that view

. A brief mention of “gas infrastructure safety ” in the course of overall risk management ; a discussion of remedies taken after a gas discharge at another facility and a pipeline safety plan; and
Board aw areness of a “f eel good” Aliso Canyon plan do not add up

to proof of the existence of a system of Board oversight over aging gas storage wells at Aliso Canyon. Marchand requires a good faith effort to implement an oversight system ; these sporadic
references do not indic ate , as a matter of law

, that either the
Board itself or its C ommittee had implemented such an oversight
apparatus. On this record, I would conclude plaintiffs ha ve raised a
reasonable doubt that the Board would have addressed a demand

rate hike to address safety risks is different from knowing what those safety risks were , and even further different from having a reporting program in place to receive t imely notice about the risks as they arose

. This is particularly so because, if the risks were critical, they should have been remediated regardless of whether SoCalGas’s proposed rate hike was approved.7

independently; ther efore, plaintiffs’ failure to make a demand was excused on ground of futility. For the same reasons, I would
conclude defendants’ demurrer should have be en overru led on the
merits. I would therefore reverse.

RUBIN, P. J.