Delaware corporate lawyers and D & O lawyers are buzzing about Chancellor Strine’s recent ruling on D & O issues while denying a motion to dismiss in a derivate claim lawsuit arising from misdeeds in China. A February 27, 2013 post at D & O Diary collects links to some of the posts and to some of the case materials. The ruling is not a formal written opinion, and instead is a hearing transcript, so one might assume a bit of breadth of wording that would not end up in a more hand-crafted opinion. That said, the words are sweeping and Chancellor Strine no doubt knew the words would reach many. The key quotes of Chancellor Strine are as follows:
"On 12(b)(6), I am sorry. Even if it’s just purely looked at as a Caremark case, drawing reasonable, rational inferences in favor of the plaintiffs, as I must, I believe the inference – one possible inference you can draw from this complaint is that essentially somebody took hold of an American vehicle, filled it with assets, sold a large amount of stock to the American investing public that independent directors were willing to go on and be a vehicle and get payments without understanding the duties they were taking on.
If you’re going to have a company domiciled for purposes of its relations with investors in Delaware and the assets and operations of the company are situated in China that, in order for you to meet your obligation of good faith, you better have your physical body in China an awful lot. You better have in place a system of controls to make sure that you know that you actually own the assets. You better have the language skills to navigate the environment in which the company is operating. You better have retained accountants and lawyers who are fit to the task of maintaining a system of controls over a public company
This is a very troubling case in terms that, the use of a Delaware entity in something along these lines. Independent directors who step into these situations involving essentially the fiduciary oversight of assets in other parts of the world have a duty not to be dummy directors. I’m not mixing up care in the sense of negligence with loyalty here, in the sense of our duty of loyalty. I’m talking about the loyalty issue of understanding that if assets are in Russia, if they’re in Nigeria, if they’re in the Middle East, if they’re in China, that you’re not going to be able to sit in your home in the U.S. and do a conference call four times a year and discharge your duty of loyalty. That won’t cut it.