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202 Delaware Law Review Volume 7:2 corporate compliance with legal standards.” The court also noted, however, that Caremark liability was premised “on a showing that the directors were conscious of the fact that they were not doing their jobs.” 120 As in Bidzos, the court rejected the plaintiff’s alleged Caremark violations on the grounds that the complaint failed to make the “kind of pleading that is critical to a Caremark claim,” such as contentions that the company lacked an audit committee, that the company had an audit committee that met only sporadically and devoted patently inadequate time to its work or that the audit committee had clear notice of serious accounting irregularities and simply chose to ignore them or, even worse, to encourage their continuation. 121 In this regard, the court’s statements in both Bidzos and Huang about what the plaintiff’s complaint did not state could form the basis for a well-pled future claim under Caremark. 122 G. Rescission Based on Innocent Misrepresentation and Unjust Enrichment Although not directly discussing Caremark or an “oversight” claim, in In re Health- South Corporation Shareholders Litigation, 123 the court granted the unusual remedy of rescission with respect to a stock repurchase by HealthSouth from Richard Scrushy, its founder and former chief executive officer and chairman, on unjust enrichment and innocent misrepresentation grounds. Specifically, in HealthSouth, the plaintiffs sought rescission of a transaction in which Scrushy paid off a loan to HealthSouth of over $25 million by giving up HealthSouth shares later found to be materially overvalued by the market as a result of 120. Id. at 506. 121. Id. at 507. 122. As it has done recently in several other cases, see Bidzos, 2003 WL 2284323, at *12-14 and Martha Stewart, 833 A.2d at 980-82 n.63, the court admonished the plaintiff for not seeking additional discovery to support its Caremark claim under section 220 of the General Corporation Law. Huang, 823 A.2d at 507. 123. 845 A.2d 1096 (Del. Ch. 2003).
2004 Recent Developments in Delaware Corporate Law 203 materially misleading public financials prepared by Scrushy’s HealthSouth subordinates. 124 Because Scrushy “stood mute” in the face of the press releases and public statements made by HealthSouth indicating that the financial statements of HealthSouth had been materially misleading at the time of the buy-back of Scrushy’s shares, the court concluded that “there [wa]s no material dispute of the fact that HealthSouth’s financial statements were materially misleading as of the date of the Buyback.” 125 With respect to the plaintiffs’ unjust enrichment claim, the court concluded that the plaintiffs had adequately demonstrated that the stock buy-back “unjustly enriched” Scrushy. In so concluding, the court relied heavily on the fact that, as CEO, “Scrushy was charged with managerial responsibility for overseeing the preparation of accurate and reliable financial statements,” upon which the board of directors was entitled to rely in approving the buy-back. 126 According to the Court of Chancery, it was Scrushy’s “managerial responsibility to ensure the filing of accurate statements and he should not, as a fiduciary, benefit at the expense of the object of his trust when his efforts were insufficient.” 127 The court also granted plaintiffs’ motion for summary judgment on their innocent misrepresentation claim. First, the court found that a false statement was made by Scrushy in that he “represented to HealthSouth that the market price was a reliable way to value his shares, thereby vouching again for the integrity of the financial statements he had signed (and earnings projections he had caused the company to make).” 128 Second, the court concluded that such statement was made with the intent to induce HealthSouth to act in that “Scrushy intended for HealthSouth to rely on the accuracy of the stock market price as a fair way to value his shares in the Buyback.” 129 Third, the court determined that HealthSouth justifiably relied on the statements made by Scrushy. Finally, the court 124. Notwithstanding Scrushy’s repeated attestations of innocence made in the pleadings (and perhaps because of them), plaintiffs did not premise their claims of unjust enrichment and innocent misrepresentation on Scrushy’s knowledge of the falsity of HealthSouth’s financials or his subordinates’ misdeeds. Id. at 1104. 125. Id. at 1105. 126. Id. 127. Id. at 1106. 128. Id. 129. Id.
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