Opinion ID: 2995704
Heading Depth: 4
Heading Rank: 2

Heading: Second prong--business judgment

Text: Under Aronson, the mere threat of personal liability for approving a questioned transaction, standing alone, is insufficient to challenge either the independence or disinterestedness of directors . . . . 473 A.2d at 815. However, demand may be excused if in rare cases a transaction may be so egregious on its face that board approval cannot meet the test of business judgment, [resulting in] a substantial likelihood of director liability, id., or if the directors exhibited gross negligence in breaching their duty of care. Brehm, 746 A.2d at 259 (citing Aronson, 473 A.2d at 812). In order to invoke the protection of the business judgment rule, Aronson holds that directors have a duty to inform themselves, prior to making a business decision, of all material information reasonably available to them. 473 A.2d at 812. Demand will be excused in a derivative suit only if the trial court and the appellate court, upon de novo review, conclude that the particularized facts in the complaint create a reasonable doubt that the informational component of the directors’ decisionmaking process, measured by concepts of gross negligence, included consideration of all material information reasonably available. Brehm, 746 A.2d at 259 (emphasis in original) (citing Aronson, 473 A.2d at 812). We find that the facts alleged are sufficient to show that although corporate governance practices were in place, the directors were grossly negligent in failing to inform themselves of all reasonably available material information. See Brehm, 746 A.2d at 259. The chairman of the board received copies of the two Warning Letters in 1994 and another in early 1999, and even though the language in the Warning Letters is described as boilerplate, continuing violations of federal regulations over a period of six years cannot be minimized. Several of the directors were members of the Audit Committee, which addressed any risks involved in regulatory compliance. In addition, given their responsibilities under the SEC filings, the directors knew of the ongoing violations and knew of the 1995 compliance plan and its subsequent failure in 1998. The FDA met at least ten times with Abbott representatives, including White and other senior officers, concerning the continuing violations of the regulations. The Wall Street Journal published information about Abbott’s FDA problems in 1995. By 1999, even a third-party analyst questioned why Abbott continued to drag[] their feet fixing the [FDA] problems. Although Abbott sought to negate the effects of this news in its press release of 1999, the release itself substantiates the fact that the company, and, correspondingly, the board of directors, knew of the problems and were aware that the FDA had threatened to file an injunction against Abbott. All of the above was material information reasonably available to [the directors]. Aronson, 473 A.2d at 815. Delaware law also states that director liability may arise for the breach of the duty to exercise appropriate attention to potentially illegal corporate activities from an unconsidered failure of the board to act in circumstances in which due attention would, arguably, have prevented the loss. In re Caremark Int’l, Inc. Derivative Litig., 698 A.2d 959, 967 (Del. Ch. 1996). The court held that a sustained or systematic failure of the board to exercise oversight . . . will establish the lack of good faith that is a necessary condition to [director] liability. Id. at 971. Although the present case does not deal with a claim of fraud like that in In re Caremark, with the extensive paper trail concerning the violations and the implied awareness of the problems in the SEC filings, it is clear that the directors either knew or should have known of the violations of law, took no steps in an effort to prevent or remedy the situation, and that failure to take any action for such an inordinate amount of time resulted in the substantial losses incurred by the consent decree. See id. Plaintiffs have alleged the directors ignored obvious problems concerning the continuing federal violations and that the directors must have known of it. See In re Baxter Int’l, Inc. Shareholders Litig., 654 A.2d 1268, 1271 (Del. Ch. 1995). Plaintiffs have pleaded with particularity what obvious danger signs were ignored and that the directors failed to take any measures. Id. We find that obvious danger signs, as particularized in six years of noncompliance, inspections, 483s, Warning Letters, notice in the press, the largest civil fine ever imposed by the FDA, and the destruction and suspension of products which accounted for approximately $250 million in corporate assets are sufficient facts to indicate that the directors failed to reasonably inform themselves and that their failure to act was not made in good faith and was contrary to the best interests of the company. See Aronson, 473 A.2d at 812, 818. With respect to demand futility, plaintiffs have sufficiently pleaded allegations to reasonably conclude that the directors’ actions fall outside the protection of the business judgment rule; allegations which demonstrate conduct so egregious that there is a substantial likelihood of director liability. Aronson, 473 A.2d at 815. Demand is therefore excused. Id.; see In re Baxter, 654 A.2d at 1270-71. We note that this holding applies only with respect to demand futility and reflects no opinion as to the truth of the allegations or the outcome of the claims on the merits.