In re Qualcomm Inc. FCPA S'holder Derivative Litig., C.A. No. 11152-VCMR (Del. Ch. June 16, 2017) (Montgomery-Reeves, V.C.)

In this letter opinion, the Court of Chancery granted defendants’ motion to dismiss a Caremark claim, finding that the stockholder derivative complaint failed to allege demand futility.

On March 1, 2016, the U.S. Securities and Exchange Commission (the “SEC”) found that Qualcomm Inc. (the “Company”) violated the Foreign Corrupt Practices Act (the “FCPA”), a federal anti-bribery law prohibiting payments to foreign government officials to obtain business abroad.  The plaintiff stockholders subsequently asserted claims for breach of fiduciary duty, waste, and unjust enrichment against the directors and a former officer of the Company.  According to the complaint, the board consciously disregarded “red flags” of corporate misconduct in connection with the Company’s business in the Asia Pacific region, including violations of the FCPA and a related SEC cease-and-desist order.

In considering the complaint, the Court observed that Rule 23.1 requires stockholders bringing derivative claims to either make demand upon the board to take action or allege that demand would be futile.  The Court analyzed the complaint under the test established in Rales v. Blasband, which requires that a stockholder derivative complaint contain particularized factual allegations creating a reasonable doubt that a board could have properly exercised its independent and disinterested business judgment in addressing a demand.  The Court further explained that a plaintiff may satisfy the demand futility test by demonstrating that its claims pose a substantial likelihood of personal liability to a majority of the board.

The Court found that the complaint failed to allege demand futility with respect to Count I, which contained a breach of fiduciary duty claim for improper oversight (known as a Caremark claim).  According to the Court, complainants generally try to satisfy the elements of a Caremark claim by alleging that the board knew of red flags of corporate misconduct and acted in bad faith by consciously disregarding its duty to act.  The Court dismissed Count I, because the complaint did not adequately allege bad faith.  The Court explained that there was no allegation that the board consciously disregarded the purported red flags, and certain documents cited in the complaint even contained board plans to take corrective actions.  In dismissing Count I, the Court also observed that the complaint failed to allege particularized facts demonstrating that a majority of the board faced a substantial likelihood of liability on the Caremark claim.

The Court next found that the complaint failed to allege demand futility with respect to Count II, which contained a waste claim against the individual defendants for certain illegal bribes made by the Company and for compensation that the Company paid to its directors and officers.  According to the Court, the directors did not face a substantial likelihood of liability on the waste claim, because the complaint did not allege that the board directed the Company to enter into a wasteful transaction or that the board authorized the illegal bribes.  The Court also found that the complaint failed to allege that the Company received inadequate consideration for the compensation that it paid to its directors and officers.  Because the complaint did not contain particularized facts demonstrating that the board was not competent to decide whether to bring a waste claim, the Court dismissed Count II.

The Court also found that the complaint failed to allege demand futility with respect to Count III, which contained a claim against the individual defendants for unjust enrichment.  The complaint alleged that the FCPA violations inflated the Company’s financial results, which enhanced the individual defendants’ compensation.  The Court dismissed Count III, finding that such an allegation was conclusory, and the directors did not face a substantial likelihood of liability based on the facts alleged.

About Potter Anderson

Potter Anderson & Corroon LLP is one of the largest and most highly regarded Delaware law firms, providing legal services to regional, national, and international clients. With more than 100 attorneys, the firm’s practice is centered on corporate law, corporate litigation, intellectual property, commercial litigation, bankruptcy, labor and employment, and real estate.