Shareholders of the Dow Chemical Company (“Dow”), brought an action against current directors and officers of Dow, alleging that the defendants breached their fiduciary duties to the company.  See In re Dow Chemical, 2010 Del. Ch. Lexis 2 (Del. Ch. Jan. 11, 2010). 

Specifically, plaintiffs’ complaint alleged breaches of fiduciary duty by the defendants by 1) approving a strategic merger with Rohm & Haas Company (“R & H”), 2) misrepresenting the relationship between the R & H transaction and another transaction with Kuwait’s Petrochemicals Industries Company ("Kuwait"), 3) failing to notice and avoid alleged bribery in connection with Dow’s merger with Kuwait, 4) failing to notice and avoid certain alleged misrepresentations, 5) failing to notice and avoid insider trading, and 6) failing to prevent allegedly excessive and wasteful compensation. 

In addition, plaintiffs alleged a Caremark claim asserting a failure to supervise, with the failure exposing Dow to bribery allegations and misrepresentations about the K-Dow and R&H transactions.   

In December 2007, Dow’s board of directors caused the company to enter into a Memorandum of Understanding with Kuwait.  The Memorandum provided for $9 billion in cash payments to Dow upon the transfer of a 50% interest in five Dow commodities chemical businesses into a joint venture with Kuwait.  The joint venture, known as “K-Dow,” provided that each company was to take a 50% equity interest in the new company.  The transaction was expected to close in late 2008.

In July 2008, the Dow board of directors approved and caused Dow to enter into a merger agreement with R & H.  This agreement provided that Dow was to acquire all of R & H’s stock for $78 a share, which comes out to approximately $18.8 billion.  The merger was expected to close two days after Dow acquired all the regulatory approvals.  The R & H merger agreement provided no traditional “outs” from completing the transaction.  There were, however, specific penalties listed for any delay or failure to close.  Additionally, the Dow board informed stockholders that the financing for the R & H merger did not depend on completing the aforementioned contract with Kuwait. 

Over the next six months, Dow felt the effects of the global economic recession.  Its cash reserves fell dramatically, and in the span of five days between December 29, 2008 and January 2, 2009, all three credit rating agencies (S & P, Moody’s and Fitch), lowered Dow’s credit ratings to just above “junk."

Nevertheless, Dow’s board of directors did everything in their power to keep the R & H merger on schedule.  Despite their efforts, on December 28, 2008, Kuwait informed Dow that the Kuwait Supreme Petroleum Council had rescinded their approval of the merger.  Although the notice given to Dow at the time did not mention a reason for the rescission, an article released in the Kuwait Times a month later alluded to the existence of bribery allegations.

Shortly thereafter, on January 25, 2009, Dow refused to close the R & H merger, citing economic concerns and viability of the combined entities.  R & H filed suit on January 26, 2009, seeking specific performance of the merger.

Resolution of the fiduciary duty claims turned upon demand excusal.  Under Aronson, the plaintiffs had to plead with particularized facts that raised a reasonable doubt that either 1) a majority of the directors who approved the transaction were disinterested and independent, or 2) the transaction was the product of the board’s good faith and informed business judgment.

First, in analyzing the first prong of the Aronson test, the Court found that plaintiffs failed to show with particularity that any members of the board of directors were not independent and disinterested.  Second, in analyzing the second prong, the Court found that the plaintiffs failed to prove with similar particularity that the board of directors had acted in bad faith.  Instead, it appeared that plaintiffs took issue with the substantive decisions of the R & H merger, and not with the process the board followed in executing the merger.  In in re Citigroup Inc. Derivative Litigation,  the Court held that the business judgment rule prohibits against this kind of second-guessing of the merits of a business decision.  In re Citigroup Inc. Derivative Litigation, 964 A.2d 106 (Del. Ch. 2009).  Because plaintiffs were not able to show the presence of either prong, the claim for breach of fiduciary duties was dismissed without prejudice pursuant to Rule 15(aaa). 

With respect to the Caremark claim, the Court found that plaintiffs failed to establish “oversight liability” by the directors.  To establish such, the plaintiffs “must show that the directors knew that they were not discharging their fiduciary obligations, or that the directors demonstrated a conscious disregard for their responsibilities by failing to act in the face of a known duty to act.”  Citigroup, 964 A.2d at 123.  While plaintiffs did present particularized facts that bribery may have occurred (although it is equally likely that in the wake of the global economic crisis, Kuwait merely used the allegations of bribery to back out of the deal), they failed to show that the board had any reason to know about or be aware of the behavior.  

Therefore, the Court found that because the plaintiffs failed to allege facts that established a substantial likelihood of direct liability due to oversight liability, their claims as to bribery in Count III are dismissed with prejudice pursuant to Rule 15(aaa).  

Primary materials are located at the DU Corporate Governance web site.