Friday, October 19, 2012

McCall v. Scott case brief

McCall v. Scott
U.S. Court of Appeals, 6th cir. 239 F.3d 808 (2001)

-McCall (Columbia/HCA healthcare corporation) is a Delaware health care corporation that sustained significant losses due to health care fraud, and was subject to a shareholder derivative suit against officers and directors alleging breach of the duty of care.
-The plaintiffs alleged that Columbia’s senior management, with Board knowledge, devised schemes to improperly increase revenue and profits. Management set growth targets at 15-20% which were 3-4 times the industry average, which could not be attained without violating Medicare and Medicaid laws/regulations. 
-Damages included: consequences of federal and state investigations, stockholder and whistle-blower lawsuits, loss of good will, falls in the value of Columbia stock. 
Procedural History
The district court dismissed the suit for failure to comply with the requirements for a shareholder derivative suit. (i.e. shareholder derivative suits require the “particularized allegations in the complaint must present a substantial likelihood of liability on part of the directors.)
1. Did the Plaintiff’s claim have a substantial likelihood of liability for the Director’s intentional or reckless breach of the fiduciary duty of care?
2. Did Columbia’s certificate of incorporation provision of “waiver of liability,” require the directors to have acted intentionally?
1. Yes, the alleged particularized facts are sufficient to present a substantial likelihood of director liability for intentional or reckless breach of the duty of care.
2. No, the district court erred in concluding that only intentional conduct would escape the protection of the “waiver of liability,” provision.

Caremark Rule: When director liability is predicated upon ignorance of liability creating activities “only a sustained or systematic failure of the board to exercise oversight-such as an utter failure to attempt to assure a reasonable information and reporting system exists- will establish the lack of good faith that is a necessary condition to liability.”


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