MetLife Stockholders Demand Futility Claims Dismissed
By: Scott E. Waxman and Marissa Leon
In the matter of In Re MetLife Inc. Derivative Litigation (Consol. C.A. No. 2019-0452-SG), the Delaware Court of Chancery held that stockholder plaintiffs seeking to hold corporate fiduciaries liable to MetLife, Inc. for failure to adequately oversee the operation of the business failed to plead facts sufficient to imply director liability or otherwise excuse demand under Rule 23.1.
The Plaintiffs, several stockholders filed a derivative claim to hold several officers and directors of MetLife, Inc. (the “Company”), the insurance and financial services corporation, liable to the Company for failure to adequately oversee the operation of its group annuity contracts business. The complaint named nine serving directors of the Company’s Board of Directors (the “Board” and, together with three serving directors of the Company that joined after the events at issue, the “Demand Board”), five former directors, and seven current and former officers of the Company (collectively, the “Defendants”).
At issue was the Company’s pension acquisition business by which the Company acquired the assets of benefit pension plans and converted them into group annuity contracts (the “Pension Risk Transfer Business”). The Company was responsible for paying annuitants when they reached the age of retirement. One of the Company’s responsibilities in operating the Pension Risk Transfer Business was to identify when annuitants were entitled to begin receiving payments, as well as to determine when those annuitants were deceased. The Company sent a letter to annuitants notifying them of their entitlement to benefits at the address provided to the Company by the employer at the time it acquired the pension obligations. Two letters were mailed to annuitants, the first at the age of 65 and the second at the age of 70 1/2 (the “Notification Procedure”), without any further attempt to reach the annuitant. If the annuitant responded to the notice, the annuity payments would commence and if the annuitant did not respond to either notice, the annuitant was presumed dead and ineligible for benefits. Once an annuitant was deemed deceased, the Company was able to release the benefits related to that annuitant into earnings.
The Plaintiffs alleged that certain “red flags” regarding the inadequacy of the Notification Procedure constituted a breach of the Defendants’ fiduciary duties. Between 2011 and 2017, the Company was subject to state regulator examinations, lawsuits, federal investigations, settlements and fines in relation to their Notification Procedure. In their pleadings, the Plaintiffs claimed demand futility arguing that a majority of the Demand Board faced a substantial likelihood of liability regarding the Company’s actions and were therefore incapable of pursuing litigation on behalf of the Company. The Defendants moved to dismiss the action under Rule 23.1 arguing that demand should have been made on the Demand Board and that even if demand was excused, the action should be dismissed under Rule 12(b)(6).
The Court reviewed the “red flags” presented by the Plaintiffs and found that the Plaintiffs did not offer specific factual allegations from which it could reasonably infer that the Demand Board was aware of such “red flags” and ignored them in bad faith. In particular, the Plaintiffs alleged that the Defendants breached their fiduciary duties by failing or refusing to implement regulator-mandated remedial measures to the Pension Risk Transfer Business and failing to put a system of internal controls in place. The Court determined that the Plaintiffs’ argument that the Defendants consciously disregarded evidence of law violations or systemic issues that prevented them from obtaining such evidence was a failed attempt to put forward a claim under In re Caremark. The Court found that the Company had an extensive network of internal controls. With respect to the second prong of the test enunciated in Caremark, the Court focused on the “red flags” relating to regulatory action and subsequent securities litigation directed at the Company in 2011 and 2012, and an internal auditor’s report presented to the audit committee of the Company by its chief auditor. The Court found that the Plaintiffs did not offer specific allegations from which it could reasonably infer that the Board was aware of red flags and ignored them in bad faith. As a result, the Court determined that the allegations did not support a reasonable inference of Caremark liability. The Court granted the Defendants’ motion to dismiss under Rule 23.1 for failure to make a demand on the Demand Board prior to filing the derivative claim. Finding that the analysis was dispositive, the Court did not rule on the 12(b)(6) motion.