In re GM Co. Derivative Litigation: Shareholder Derivative Litigation Dismissed

In In re GM Co. Derivative Litig., C.A. No. 9672-VCG, 2015 BL 206881 (Del. Ch. June 26, 2015), the Delaware Chancery Court held the shareholders of General Motors Company (“GM”)(collectively, “Plaintiffs”) did not sufficiently plead GM’s Board of Directors (collectively, “Defendants”) breached its duty of loyalty to shareholders by acting in bad faith. Thus, the court granted Defendants’ motion to dismiss Plaintiffs’ derivative suit under Rule 23.1.

In February 2014, GM issued mass amounts of recalls over several months due to ignition switch malfunctions in automobiles. The defect caused many serious injuries and resulted in several deaths. As a result, GM lost approximately $1.5 billion against earnings through the first and second quarters of 2014, set up the Ignition Compensation Fund, and agreed to pay a civil penalty of $35 million. Based on these losses, Plaintiffs filed a derivate suit alleging the Defendants breached its duty of loyalty by failing to oversee GM’s operations. Plaintiffs challenged both the specific actions of the Defendants and the Defendants’ inaction by failure to oversee.

 Plaintiffs “must plead with particularity, the facts that raise a reasonable doubt that (1) the directors are disinterested and independent or (2) the challenged transaction was otherwise the product of a valid exercise of business judgment.” Shareholders in this case made “no attempt” to challenge the independence of the board. As a result, they asserted that the decision was not a product of a valid exercise of business judgment. Moreover, because GM had a waiver of liability provision, shareholders had to allege that the actions of the board were in bad faith.

Plaintiffs challenged the risk management system. Defendants’ allegedly transferred risk management from former CRO to the then General Auditor and from the Finance and Risk Committee to the Audit Committee. As the court described: 

• The court characterized Plaintiffs’ claim that a transfer of duties was improper as allegations that were “merely conclusory.” Plaintiffs failed to sufficiently allege the directors had actual or constructive knowledge that their risk management system was inadequate. While acknowledging the transfer might, in hindsight, not have been a good decision, the court concluded that the allegations did not demonstrate bad faith. 

Second, Plaintiffs sought to show bad faith by alleging that Defendants “utterly failed to implement a reporting system, which would have apprised them specifically of serious injuries and deaths resulting from safety defects” and consciously failed to monitor existing systems. Under Caremark, director liability for inaction arises where “(a) the directors utterly failed to implement any reporting or information system or controls; or (b) having implemented such a system or controls, consciously failed to monitor or oversee its operations.”

The court concluded Plaintiffs did not sufficiently plead facts demonstrating the directors were liable for inaction. Specifically, the court found Plaintiffs did not plead with particularity that Defendants failed to implement any reporting system because Plaintiffs’ complaint conceded that GM did have a system for reporting risk. The court also found Plaintiffs failed to plead with particularity, the “existence of ‘red flags’ that the Board consciously ignored” or on any other basis, “knowledge that GM’s existing systems were inadequate. 

Accordingly, the court granted Defendants’ Motion to Dismiss for failure to comply with Rule 23.1. 

The primary materials for this case may be found on the DU Corporate Governance website.