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

Procedural Background/Facts: McCall (Columbia/HCA healthcare corporation) is a Delaware health care corporation that sustained significant losses because of health care fraud, and was subject to a shareholder derivative suit against officers and directors alleging breach of the duty of care. 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, declines in the value of Columbia stock. 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 “partizularized allegations in the complaint must present a substantial likelihood of liability on part of the directors.)

Issue: 1. Whether the Plaintiff’s claim had a substantial likelihood of liability for the Director’s intentional or reckless breach of the fiduciary duty of care?
2. Whether Columbia’s certificate of incorporation provision of “waiver of liability,” requires the directors to have acted intentionally?

Holding:
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.

Analysis:
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.”