A Delaware chancery court this week cited Dow Chemical’s corporate compliance program as a reason for dismissing a shareholder derivative suit against the company’s current directors that alleged they failed to prevent overseas bribery.
The suit was first filed in February 2009. It was based partly on the decision by Kuwait’s parliament to rescind the purchase of some of Dow’s assets. Kuwait rejected the deal — known as K-Dow — because of “suspicions of profiteering and accepting all forms of commissions” by executives of the buyer, state-owned Kuwait Petrochemicals Industries Company.
Based on Kuwait’s allegations, the plaintiffs in the Delaware case said Dow’s board “failed to detect and prevent bribery in connection with the K-Dow transaction.” The chancery court rejected the claim. It said although “plaintiffs allege that bribery may have occurred, they do not allege that the board knew about, or had reason to suspect, bribery.” On that basis, the allegations in the complaint concerning the K-Dow deal were dismissed, along with the rest of the complaint.
In a footnote that may have important consequences beyond this case, the court said Dow’s compliance program was evidence that the board had met its fiduciary duty to prevent overseas bribery. It said there was enough evidence for purposes of the motion to dismiss to assume that bribery had occurred. But even if it had, that didn’t prove the board was liable unless the plaintiffs could also show the board intentionally ignored the compliance program.
The court said,
Plaintiffs cannot meet their burden here for another reason. The Dow board has set up policies to prevent improper dealing with third parties. In particular, Dow’s Code of Ethics expressly prohibits any unethical payments to third parties. Moreover, plaintiffs’ own complaint once again belies their argument. Contained within Count II’s litany of alleged breaches of fiduciary duty plaintiffs implicitly acknowledge Dow’s “corporate governance procedures.”. . . Plaintiffs cannot simultaneously argue that the Dow board “utterly failed” to meet its oversight duties yet had “corporate governance procedures” in place without alleging that the board deliberately failed to monitor its ethics policy or its internal procedures.
The case is a powerful reason for directors and officers to insist on robust antibribery compliance programs that include regular reports back to the board.
A copy of the memorandum opinion by the Delaware chancery court in In Re The Dow Chemical Company Derivative Litigation, Consolidated Civil Action No. 4349-CC, decided January 11, 2010, can be downloaded here.
A copy of Dow’s code of business conduct (in 20 languages) can be downloaded here.
We’re grateful once again to Marc Bohn for his invaluable help with this post.