Judges and commentators frequently characterize Caremark claims (claims seeking to hold directors liable for damages resulting from grossly inadequate reporting regimes or oversight) as the most difficult kind of breach of fiduciary claim to assert with success. In a recent Court of Chancery opinion in Shabbouei v. Laurent Potdevin and Lululemon Athletica, C.A. No. 2018-0847-JRS (Del. Ch. Apr. 2, 2020), Vice Chancellor Joseph Slights rejected the plaintiff’s effort to recharacterize what was essentially an inadequate Caremark claim into a self-interested, unfair dealing claim against the board arising from its termination of a CEO accused of sexual misconduct. Dismissing the claim under a straight-forward Rule 23.1 analysis of demand futility, the court found the allegations did not support an inference that the board’s decision to make a severance agreement rather than terminate the CEO for cause resulted from the board’s desire to insulate itself from claims that it had exercised inadequate  oversight over the CEO’s conduct.

Background

A Lululemon stockholder brought a derivative suit alleging that the board breached its fiduciary duties by rushing to pay an excessive severance fee of $5 million to facilitate the CEO’s separation and cover up their slow response to his well-documented malfeasance. The CEO Potdevin had an employment agreement that permitted his termination “without cause” and “for cause,” with the former affording significant severance payments. The company had a Global Code of Business Conduct and Ethics for its employees that prohibited “harassment or unlawful behavior of any kind, including derogatory comments based on race or ethnicity or unwelcome sexual advances.” The company had an anonymous hotline to encourage reporting of violations, and it charged the board committees with overseeing compliance with the Ethics code. The complaint alleged that the CEO had an inappropriate relationship with an employee and had created a toxic culture of harassment and favoritism that led to the departure of high ranking employees and a number of complaints to the hotline.

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