In the last issue of A Potpourri we wrote about the shareholder derivative suit against the Abbott Laboratories (“Abbott”) Board of Directors alleging they consciously ignored quality control problems resulting in a $100 million civil fine. The Abbott shareholders “accused the directors not only of gross negligence but of intentional conduct in failing to address the federal violation problems, alleging a conscious disregard of known risks, which conduct, if proved, cannot have been undertaken in good faith.”
In this issue, we discuss the response of the directors that they were not personally liable because of the following provision of the Abbott articles of incorporation:
A director of the corporation shall not be personally liable to the corporation or its shareholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director’s duty of loyalty to the corporation or its shareholders, (ii) for acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law, (iii) under section 8.65 of the Illinois Business Corporation Act (listing under circumstances where a director can avoid personal liability), or (iv) for any transaction from which the director derived an improper personal benefit.
Abbott is an Illinois corporation. The language of this section is identical to a section of the Illinois Business Corporation Act, which mirrors Delaware law, that eliminates personal liability of the directors for damages for breaches of the duty of care.
Notwithstanding a facially apparent exemption, the court said directors are not personally protected where the complaint sufficiently alleges a breach of fiduciary duties based on a failure of the directors to act in good faith, as bad-faith actions present a question of fact that cannot be determined at the pleading stage. The court thus allowed plaintiffs to press their claim against the Abbott directors.
The key points to take from this decision:
• Grossly negligent conduct of directors, absent an allegation of bad faith, is exempted; duty of care claims based on reckless or intentional misconduct are not exempted.
• The complaint must plead claims of non-exempt conduct with sufficient particularity to permit the court to reasonably conclude the directors’ conduct falls outside the exemption.
• Intentional or reckless disregard could be inferred from the directors’ failure to act in the face of obvious facts.
• The magnitude and duration of the alleged wrongdoing is relevant in determining whether the failure of the directors to act constitutes a lack of good faith.
We regularly advise directors of their rights and responsibilities to avoid personal liability. Call us if you have any question about the Abbott decision or its implications.