The following fact pattern should be familiar. A high-profile news story runs detailing years of sexual harassment by the CEO of a company. Four women sued, claiming that the CEO repeatedly propositioned or groped female employees, and rewarded or punished them based on whether they complied or complained. The article questioned the company's culture: it sanctioned a "best legs" contest for female employees, few women served in high-level positions, and no women served on the board of directors. While one director would complain that the CEO "can't keep it in his pants," the members of the board of directors admitted in depositions that they never sanctioned the CEO for his alleged conduct. All told, eight harassment claims were settled for millions of dollars, subject to the employees signing confidentiality agreements. The company also loaned the CEO the funds to settle the claims. And in the face of these lawsuits, the company implemented a binding arbitration program to adjudicate future sexual harassment claims in a sealed proceeding.
This fact pattern is not from the current #MeToo movement. Instead, it comes from the Delaware courts' decisions in White v. Panic, 793 A.2d 356 (Del. Ch. 2000), affirmed 783 A.2d 543 (Del. 2001). The company was ICN Pharmaceuticals, Inc., and the claims involved its former CEO. The plaintiff filed a derivative complaint for breach of fiduciary duty against the CEO and the members of ICN's board of directors for, among other things, failing to curb the CEO's alleged misconduct and for using corporate funds either to pay the settlements or to guarantee the loan to the CEO.
The Delaware Court of Chancery dismissed the claims, and the Delaware Supreme Court affirmed, because the plaintiff failed to plead particularized facts creating a reasonable doubt that the directors' decisions were a good faith exercise of business judgment. While acknowledging a possible inference that the board wanted to protect the CEO because the company needed him to generate business, the courts noted that the directors could have decided that the harassment claims were without merit and should be settled for nuisance value. Because he failed to inspect the board minutes and other company records, the plaintiff was unable to rebut this presumably good faith decision by the board. Also of significance: each court noted that the plaintiff specifically disclaimed bringing a Caremark [698 A.2d 959 (1996)] claim based on a "failure to monitor."
Looking at the allegations in White today, one is left with three questions. First, would the same result follow, if these claims were brought for the first time this year? Second, would the complaint have been dismissed if it had been brought as an oversight case under Caremark? Third, how much comfort should counsel have in how a court would apply White, if advising a board on these issues today?
Note to readers: Today's post was written by my new partner, Rick Horvath, who focuses on representing directors, officers, and companies in shareholder class actions and derivative litigation, including alleged violations of federal securities laws, breaches of fiduciary duty, and M&A transactions.