February 10, 2016
Dissident General Motors investors have failed to persuade the Delaware Supreme Court to give them another chance to prove the automakers’ directors negligently relied on a defect reporting system that failed to alert them to deadly ignition switch flaws for five years.
After holding a special oral argument session at the Widener University Delaware Law School in Wilmington on Feb. 10, the justices now must decide whether to uphold a Chancery Court judge’s dismissal of charges that GM’s directors were asleep at the wheel and missed a fatal vehicle flaw. In re Gen. Motors Co. Derivative Litig., No. 9627, 2015 WL 3958724 (Del. Ch. June 26, 2015).
The high court must determine whether the “business judgment” rule of the corporate law of Delaware, where GM and most of the nation’s larger companies are incorporated, shields directors who oversaw a flawed quality monitoring system or find them grossly negligent and beyond the protection of that deferential standard.
At stake is the GM shareholders’ apparently last chance to pursue a derivative suit against the directors for breaching their duty of good faith to ensure that they were receiving timely, accurate and complete reports of defects in GM vehicles.
Since the plaintiffs sued on behalf of all GM shareholders and did not give the directors an opportunity to first review their charges through a so-called pre-suit demand they were required to prove the board could not fairly judge the merits of their allegations before they could proceed to discovery.
Vice Chancellor Sam Glasscock III found that the plaintiffs failed to make such a showing, and he dismissed the suit.
If the Delaware Supreme Court upholds the judge’s ruling, other would-be derivative plaintiffs will be barred from stepping in as the new shareholder champion to pursue the same charges.
But Delaware law experts agreed that the GM plaintiff shareholders had a tough row to hoe in trying to convince the state high court that the reporting system the board implemented was so “utterly useless” that relying on it constituted gross misconduct.
Widener professor Paul Regan, who took his corporate law classes to Wednesday’s oral argument, said the odds do not appear to be in the plaintiffs’ favor.
Even if they proved the directors made bad or negligent decisions about the defect reporting system’s setup and operation, he said, it won’t be enough to revive their suit because “the standard of bad faith regarding the duty of care is very tough to meet.”
Regan noted that the justices closely questioned plaintiffs’ attorney David A. Jenkins of Smith Katzenstein & Jenkins in Wilmington, on his attempt to prove that the directors exhibited bad faith — rather than mere negligence — in using a reporting system that failed to get them the information they needed on a spate of disastrous ignition switch lockups.
The justices had no questions for defense attorney Robert J. Kopecky of Kirkland & Ellis in Chicago, who recited a litany of the directors’ well-intentioned attempts to ensure that they were getting up-to-date information on defects after GM emerged from bankruptcy protection in 2009, Regan said.
Kopecky acknowledged that until February 2014 the defect reporting system did not officially alert the GM board to the seriousness of the ignition defect, which caused some GM cars to suddenly shut off.
Though flaws in the defect reporting system allowed the problem to persist, resulting in 2.6 million recalled vehicles, hundreds of accidents and dozens of deaths, the shareholder plaintiffs are confusing bad outcomes with bad faith, Kopecky said.
“The complaint does not even allege that the directors knew about the problem and failed to act, and GM has not been sanctioned for failure to comply with government regulators,” Kopecky told the court.
Since there is ample proof that GM did have a reporting system — however flawed — in place from 2009 to 2014, the plaintiffs were not excused from making a demand on the board, and the suit was rightly dismissed, Kopecky argued.
The Supreme Court normally confers after oral argument and may take up to three months to issue an opinion, but recently it has issued short orders within days affirming several Chancery Court decisions on procedural issues.
In re General Motors Co. Derivative Litigation, No. 392, 2015, oral argument held (Del. Feb. 10, 2016).