Distressed Governance Tracker - Segway Inc. v. Hong Cai, a/k/a Judy Cai, C.A. No. 2022-1110-LWW (Del. Ch. December 14, 2023)
About the Author
The author, Michael R. Nestor, is Vice-Chair of the Firm, a member of the Firm’s Management Committee, and co-head of the Firm’s Portfolio Company Management Group.
RULING
Plaintiff brought breach of fiduciary duty claims against a former officer arising from alleged mismanagement that resulted in declining sales and increased accounts receivable. Noting that plaintiff’s misperception that “a Caremark claim is lowered when a claim is brought against an officer” was a “distressing reading of our law,” Vice-Chancellor Will confirmed that “bad faith remains a necessary predicate to any Caremark claim” and ruled that plaintiff’s “attempt to hold a corporate officer accountable for unexceptional financial struggles flouts these enduring principles.” As such, the Chancery Court granted the defendant’s motion to dismiss.
RESTRUCTURING LESSON
Most chapter 11 filings are preceded by unfortunate business realities that are unrelated to the effort/work of company management and boards. Management (and advisors) can take comfort in Vice-Chancellor Will’s decision, wherein she applied well-settled principles of Delaware law relating alleged breaches of the duty of care and confirmed that
- Caremark claims against officers are not subject to a “lower bar” than claims against directors; and
- Such claims continue to be subject to the requisite level of “bad faith.” As such, the Court concluded that efforts “to hold a corporate officer accountable for unexceptional financial struggles” will not survive a motion to dismiss.