CURRENT MONTH (October 2021)

Business Litigation

Delaware Court of Chancery Dismisses Caremark Claim Arising from Marriott Cybersecurity Breach

By K. Tyler O’Connell of Morris James LLP

The Delaware Court of Chancery dismissed pursuant to Rule 23.1 derivative claims arising from the hack of roughly 500 million users’ personal data following Marriott’s 2016 acquisition of Starwood Hotels and Resorts—one of the largest hacks ever, an event that spawned lawsuits and governmental investigations. See Fire Ret. Sys. of St. Louis v. Sorenson, et al., 2021 WL 4593777 (Del. Ch. Oct. 5, 2021). Among other things, the stockholder-plaintiff failed to allege with particularity facts showing that a majority of the board of directors consciously disregarded “red flags” showing alleged non-compliance with data privacy norms. “With hindsight knowledge of the extent of the data breach,” the board’s remediation plan was implemented “probably too slow.” Id. at *16. But, the Court reasoned, “the difference between a flawed effort and a deliberate failure to act is one of extent and intent. A Caremark violation requires the plaintiff to demonstrate the latter.” Id. at *19. Accordingly, the Court dismissed the plaintiff’s complaint.

Delaware Court of Chancery Upholds Incumbent Directors’ Decision not to Excuse Non-Compliance with Advance Notice Bylaw

By K. Tyler O’Connell of Morris James LLP

The Delaware Court of Chancery recently upheld incumbents’ decision not to include insurgent director nominees on the ballot due to their failure to comply with an advance notice bylaw. See Rosenbaum v. CytoDyn Inc., 2021 WL 4775410 (Del. Ch. Oct. 13, 2021). For months, the director nominees and certain affiliated stockholders were aware of the requirements of the bylaw, which had been adopted on a clear day. On the eve of the deadline, they submitted a deficient notice that failed to disclose (i) the supporters of the nominees or their proposals, and (ii) the fact one nominee recently tried to have the corporation purchase his separate business, and that he may do so again. The Court reasoned that, had the stockholders proceeded sooner, and submitted a deficient notice with “ample time” before the deadline, then directors exercising their fiduciary duties may have had to work with the dissidents to address the deficiencies. Id. at *17. As it stood, however, the incumbents’ decision to enforce the bylaw did not evince “manipulative conduct” in violation of the incumbents’ fiduciary duties. See id. at *14-17.

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