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Delaware Chancery Court rules hotel corporation plaintiff failed to allege particular facts

Courts Privacy/Cyber Risk & Data Security Derivatives Data Breach

Courts

On October 5, the Court of Chancery of the State of Delaware dismissed a stockholder derivative suit filed against directors of an international hotel corporation arising out of massive data breach. The court held that the plaintiff was not excused from making a demand on the board because he failed to show that the directors faced a substantial likelihood of liability on a non-exculpated claim.

The data breach, which exposed the personal information of approximately 500 million customers, took place via the reservation database of a property company that the corporation had acquired two years prior. The plaintiff alleged that the directors breached their fiduciary duties by failing to adequately conduct due diligence of cybersecurity technology for the property company in the pre-acquisition time period. For the post-acquisition period, the plaintiff alleged that the defendants continued to operate the property company’s deficient systems, failed to timely disclose the data breach, and that the directors breached their duty of loyalty under In re Caremark Int’l Inc. Derivative Litigation, a 1996 Delaware Chancery Court decision establishing a standard for oversight liability for board members.

With respect to the pre-acquisition time period, the court held that the plaintiff’s claims were time-barred and that was no basis for tolling. As to the post-acquisition claims, the court concluded that the directors do not face a substantial likelihood of liability under Caremark. Although the court noted that “[c]ybersecurity has increasingly become a central compliance risk deserving of board level monitoring at companies across sectors,” the allegations “do not meet the high bar required to state a Caremark claim. According to the court, the plaintiff has not shown that the directors completely failed to undertake their oversight responsibilities, turned a blind eye to known compliance violations, or consciously failed to remediate cybersecurity failures.” The court acknowledged that the data breach was “momentous in scale and put the data of hundreds of millions of people at risk,” but concluded that the actions were “at the hands of a hacker,” saying that “[the corporation] was the victim of an illegal act rather than the perpetrator.”

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