Boards of Delaware corporations control the company’s assets, which includes by default derivative claims for breach of fiduciary duty against the company’s directors and officers.  When derivative claims survive dismissal because demand is excused with respect to the full board, a powerful tool remains at the board’s disposal to reassert control and, in the right conditions, elect to dismiss the claims: a special litigation committee comprised of independent and disinterested directors. In re Carvana Stockholders Litigation, Consol. C.A. No. 2020-0415-KSJM (Del. Ch. Mar. 27, 2024) is another example of a board successfully employing this process to discontinue a derivative suit after directors weighed the pros and cons and made a good faith business judgment to dismiss.  

Background

This action concerned a direct offering made by the online used car retailer, Carvana, in March 2020. That offering followed some disruption at the onset of the COVID-19 pandemic that prompted the board to seek a quick financing solution. The direct offering was capped at $600 million at a price of $45 per share, which represented an 8.2% discount to the stock’s unaffected trading price. The company’s controlling stockholders, Ernest Garcia II and Ernest Garcia III, participated in the offering for $50 million. The company rebounded in the months after the offering. By the end of 2020, the stock price closed at nearly $240 per share. And over several months in late 2020, Garcia II sold approximately $1 billion worth of his shares.