In-depth review blog No strict liability for improper share buybacks or dividend payments: directors are “fully protected” if they trust company records, officers or experts in good faith


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In concerning the litigation on the derivatives of the company Chemours, Vice Chancellor Glasscock recently battled an apparent conflict between two provisions of the Delaware General Corporation Law (DGCL) and chose the path that protects directors. Vice-Chancellor Glasscock refused to hold directors strictly responsible for share buybacks or negligent dividends – which would be inconsistent with the general limitation of Delaware directors’ liability to only damages for gross negligence (unless exonerated). ) or breaches of loyalty – and instead applied an “incongruous” provision which grants protection to directors when they rely on company records, officers or experts regarding company surplus available to buy back shares or issue dividends.

Chemours Company shareholders alleged that the share buybacks and dividends should not have been paid because the Chemours Company faced huge environmental liabilities – not recognized under GAAP – so it did not had no business surplus and was in fact insolvent or “on the verge of insolvency” at the time of the allocations. Even though the plaintiffs themselves had received the dividends, they requested under Article 174 of the DGCL to hold the directors strictly responsible for reimbursing the company for the amounts distributed for share buybacks and dividends. The Plaintiffs alleged that the Defendants’ Director at least was negligent in relying on GAAP-based accounting (which they claimed did not require reserves for contingent environmental liabilities) to calculate the excess .

Article 174 of the DGCL provides that, when the company voluntarily or negligently redeems shares or issues dividends when these distributions exceed the surplus of the company, the directors “under whose administration” the violation occurred ” will be jointly and severally liable towards the company, and towards its creditors in the event of dissolution or insolvency, up to all the sums illegally paid, with interest. As Vice-Chancellor Glasscock observed, section 174 “appears to impose strict and joint and several liability on any vicarious director for the negligence of another actor in the business as well as for his own negligence. , and impose as damages the full amount paid even if no real prejudice is caused to the interests of the company in the end.

Section 172, on the other hand, provides that directors are “fully protected” against liability if they rely in good faith on company records, officers, board committees or other experts. “With regard to the value and amount of the assets, liabilities and / or net profits of the company or any other fact relating to the existence and amount of surplus or other funds from which dividends could be properly declared and paid, or with which the shares of the company could be properly bought or redeemed. Vice-Chancellor Glasscock applied this provision, arguing that section 174 “must be read in conjunction with” section 172.

Vice Chancellor Glasscock dismissed the case on grounds of the futility of the claim, arguing that the plaintiffs had failed to plead specific facts which, if true, imply that the defendants’ director faces a likelihood. substantial liability and would be unable to assess a claim to bring claims on behalf of the company. In particular, Vice-Chancellor Glasscock relied on the fact that the board had discussed environmental responsibilities on several occasions, and the plaintiffs had not alleged any particular facts undermining the board’s confidence in GAAP-based accounting as part of its determinations that share buybacks and dividend payments complied with the DGCL. The Court also ruled that section 172 could be considered at the argument stage — and that the Board’s consultations with management and financial advisers (after receiving submissions on environmental liabilities) determined that they were “fully protected” under section 172 from personal liability under section 174.

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