In re The Home Depot, Inc. Shareholder Derivative Litigation

United States District Court for the Northern District of Georgia · 2016 · Corporations

CorporationsShareholder derivative suitsDemand futilityDirector oversightCorporate wasteSection 14(a)demand requirementdemand futility

Facts

After Home Depot learned in September 2014 that hackers had stolen payment-card data from millions of customers, shareholders sued derivatively without first demanding that the board act. The complaint alleged that the board had dissolved an Infrastructure Committee, failed formally to amend the Audit Committee charter to reflect oversight of data security, and allowed Home Depot to remain out of compliance with PCI DSS despite repeated reports from the CIO. The complaint also acknowledged that management had informed the board and audit committee of deficiencies, that a remediation plan existed and was being implemented before the breach was discovered, and that the board continued receiving regular updates. Plaintiffs further alleged that omissions in Home Depot's 2014 and 2015 proxy statements concerning oversight structure and data-security threats violated Section 14(a).

Issue

Whether the shareholders' failure to make a pre-suit demand on Home Depot's board was excused as futile because a majority of the current directors faced a substantial likelihood of liability for oversight-based loyalty claims, corporate waste, or Section 14(a) proxy violations. Relatedly, whether the Section 14(a) claims were subject to the derivative demand requirement and sufficiently pleaded.

Rule

In a Delaware derivative suit challenging board inaction rather than a specific board decision, demand is excused only if particularized factual allegations create a reasonable doubt that, at the time suit was filed, the board could have properly exercised independent and disinterested business judgment in responding to a demand. For oversight-based loyalty claims, plaintiffs must show that directors knew they were not discharging fiduciary duties or consciously disregarded a known duty to act; merely alleging that the board acted too slowly or imperfectly is insufficient where the board undertook some reasonable course of action. Corporate waste requires an exchange so one-sided that no person of ordinary, sound judgment could find adequate consideration, and Section 14(a) derivative claims are subject to demand and to PSLRA heightened pleading, including particularized pleading of misleading statements or omissions, materiality, and causation.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

Pine Harbor Outfitters, a Delaware corporation headquartered in Denver, suffers a ransomware attack after several years of warnings about weak network segmentation. A shareholder files a derivative suit in federal court without making a pre-suit demand, alleging the board failed to act, but the complaint challenges no specific board vote or transaction.

Which standard should the court apply to determine whether demand is excused?

Explanation. Where the suit challenges board inaction rather than a specific board decision, the majority opinion applies Rales. Demand is excused only if particularized allegations create a reasonable doubt that, as of filing, the board could properly exercise independent and disinterested business judgment in responding to a demand. Mere negligence or the existence of an oversight claim does not automatically excuse demand. (Derived from In re The Home Depot, Inc. Shareholder Derivative Litigation (n.d.).)