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One of the many claims brought by the plaintiffs in the In re Plug Power Inc. Stockholder Derivative Litigation challenged the adequacy of board reporting and monitoring systems for responding to SEC comment letters — alleging inadequate oversight under Caremark. Here’s the factual background from this Stinson blog:

The Company received five comment letters from the SEC between mid-2018 and early 2021 . . . The allegations reflect that the Audit Committee discussed SEC letters during that period, although there was scant mention of those letters in the minutes.

As the memorandum opinion notes, to state a Caremark claim, alleged facts must show either (1) “the directors utterly failed to implement any reporting or information system or controls” or (2) “having implemented such a system or controls, consciously failed to monitor or oversee its operations thus disabling themselves from being informed of risks or problems requiring their attention.”

To support their information systems claim the Plaintiffs argued:

• SEC comment letters generally present a distinct risk that requires its own monitoring system beyond the ambit of the Audit Committee; and
• The Audit Committee discussions were not sufficiently robust.

The court ultimately found that the plaintiffs didn’t plead facts sufficient to meet the “high bar” to hold directors personally liable for a failure of oversight and dismissed the Caremark claims.

The Court noted that Delaware law does not dictate what structure a reporting system must take. Rather, under Delaware law, “how directors choose to craft a monitoring system in the context of their company and industry is a discretionary matter.”   That is, the law requires courts to exercise good faith oversight, “not to employ a system to the plaintiffs’ liking.”

Turning toward the allegation that the Audit Committee discussions were not sufficiently robust, the Court noted the “absence of regular board-level discussions on the relevant topic” “alone is not enough for the [c]ourt to conclude a board of directors acted in bad faith.” Plaintiffs’ disagreement with the adequacy of the Audit Committee’s or Board’s consideration of the SEC comment letters did not mean that the Board failed to make a good-faith effort to establish a system.

As to the Plaintiff’s red flag allegations, the Court doubted receipt of an SEC comment letter alone was a red flag.  Even if the comment letters constituted a red flag, it was not reasonable to conclude based on the facts alleged that the Board ignored them in bad faith.  Plug Power’s system in place worked to some degree—Plug Power responded promptly to each of them and the Audit Committee received reports about them.

That said, the opinion doesn’t rule out the possibility that similar allegations could be successful under different circumstances.

It bears noting that Plaintiffs’ Caremark allegations were particularly underdeveloped. One can imagine a situation where the absence of any discussion on a central compliance risk in Board or committee minutes is sufficient to supply the inferences that Plaintiffs seek, at least where the risks are more severe and the absence of discussion far more glaring. But this case was an afterthought to the Securities Action. And the Caremark claim was an afterthought to the Brophy claims. And the Amended Complaint reflects all of this—facts shoved into the boxes of belatedly raised theories. The inferences just were not there.

– Meredith Ervine