Securities Industry Commentator by Bill Singer Esq

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In re MetLife Inc. Derivative Litigation (Delaware Chancery Court Opinion)

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[O]nly where a plaintiff is able to plead with particularity circumstances raising a reasonable doubt that the board is able to exercise its business judgment to consider the proposed legal action is demand excused, and the plaintiff empowered to proceed derivatively on behalf of the corporation. 

Here, the only reason advanced by the Plaintiffs that demand should be excused is that a majority of the demand board would themselves be liable in this action alleging a failure to oversee the business, and therefore the board could not fairly consider a demand. A corporate oversight claim under the Caremark rationale, however, is notoriously difficult for plaintiffs. I find that the Plaintiffs have failed to plead facts sufficient to imply director liability or otherwise to excuse demand under Rule 23.1.

The complaint alleges that a long-standing part of MetLife's business is to undertake other businesses' fixed-benefit pension obligations to employees, by agreeing to pay an annuity to the employee once the employee retires and benefits become payable. This business operation, which MetLife calls the Pension Risk Transfer Business, has been a part of the MetLife operation since 1921. Historically, MetLife has given notice to employee/annuitants of entitlement to benefits at the address provided to them by the employer, by letters sent when each employee turned 65 and again when the employee reached 70 years and six months of age (the "two-letter" policy). If the employee thereafter responded to the notice, the annuity payments would commence; if not, the Company would presume the employee was dead and ineligible for benefits. 

This system was hardly foolproof-some employees were alive but not at the address provided. As technology has improved, better tools to identify and locate annuitants developed, including a computerized list of deceased American employees maintained by the U.S. Social Security Administration and called the Death Master File. That list enumerated those who had died, not those who remained alive; nonetheless, it enabled a cross-check against MetLife's assumptions of annuitant demise. According to the complaint, MetLife was slow to adopt this and other new technology, allowing the Company, wrongfully, to avoid payments to annuitants and, because of the erroneous assumptions of annuitant death, release reserves associated with that annuitant into Company earnings. In fact, MetLife used the Death Master File to inform itself, in some cases, of annuitant death in order to stop making payments, but not in the Pension Risk Transfer Business to potentially refute assumptions of death, which allowed the Company to avoid commencing payments. Ultimately, in December 2017, MetLife revealed in a Form 8-K that it had discovered the weaknesses inherent in the two-letter policy, and that it would enhance identification of annuitants in the Pension Risk Transfer Business and "strengthen" reserves, and warned that the changes could be material to operations. Class action securities litigation followed, as well as regulatory actions by the states of New York and Massachusetts, which have resulted in many millions of dollars of fines and restitution payments imposed upon the Company. The complaint alleges that the Defendants failed to adopt these procedures in a timely way, and should be held liable for breach of duty. 

The Defendant Directors here are protected by an exculpatory clause in the corporate charter. In order for me to find it sufficiently likely that they are liable so that demand is excused, therefore, the complaint must contain specific allegations of fact from which I may infer that the Director Defendants' actions or inaction were in bad faith; that is, in conscious disregard of their duties. I find, however, that the allegations that the Defendant Directors failed to ensure that the Company supplemented or superseded the two-letter policy falls short of a specific pleading of bad faith. Demand is not excused, therefore, and this matter is dismissed.

• Securities Industry Commentator
• Bill Singer