The Best Defense is a Good Defense: Robust Anticorruption Policy Scuttles Derivative Suit Against Dow Officers and Directors

January 19, 2010

On Jan. 11, 2010, the Delaware Chancery Court dismissed a shareholder derivative suit against Dow Chemical’s current directors and officers styled In re the Dow Chemical Co. Derivative Litig., Consolidated Civil Action No. 4349-CC (see full opinion). Plaintiffs had alleged, among other things, that an attempted joint venture with a company in Kuwait “fell apart because Dow officers bribed certain senior Kuwaiti officials” and that “the Dow board was aware of or should have been aware of the bribery and failed to do anything.” (Opinion at 12).

In December 2007, Dow entered a joint venture with Kuwait’s Petrochemical Industries Company in a deal that became known as “K-Dow.” In December 2008, the Kuwait Supreme Petroleum Council informed Dow that it was rescinding the K-Dow joint venture. According to an article in the Kuwait Times in January 2009, “the National Assembly had voted overwhelmingly to investigate ‘suspicions of profiteering and accepting all forms of commissions by oil executives’ involved in several deals, including K-Dow.” (Opinion at 10). The plaintiff’s allegations of bribery were based primarily on the January 2009 article, and the plaintiffs did not dispute that no formal charge of bribery had been made by Kuwaiti or U.S. officials. (Opinion at 32-33).

The Delaware Chancery Court granted the defendant’s motion to dismiss, in part because plaintiffs failed to allege that the directors and officers “consciously disregarded their duty to supervise against bribery,” even if bribery had in fact occurred. (Opinion at 34-35). The court noted that for the plaintiffs to establish oversight liability on the part of the directors and officers, they would need to demonstrate that the directors and officers “deliberately failed to monitor its ethics policy or its internal procedures.”

According to the court:

“The Dow board has set up policies to prevent improper dealing with third parties. In particular, Dow’s Code of Ethics expressly prohibits any unethical payments to third parties. Moreover, plaintiffs’ own complaint once again belies their argument. Contained within Count II’s litany of alleged breaches of fiduciary duty plaintiffs implicitly acknowledge Dow’s ‘corporate governance procedures.’ … Plaintiffs cannot simultaneously argue that the Dow board ‘utterly failed’ to meet its oversight duties yet had ‘corporate governance procedures’ in place without alleging that the board deliberately failed to monitor its ethics policy or its internal procedures.”
(Opinion at 35 n. 85).

In re Dow is a potentially significant case for both potential plaintiffs, who now have a fresh road map for bringing allegations of FCPA-related failures of oversight, and for officers and directors, who have a solid precedent for defending against such allegations via the establishment and maintenance of a robust anticorruption compliance program.

The case also comes on the heels of last summer’s Nature’s Sunshine settlement, where the SEC relied on a control person theory to assert FCPA liability against high-level corporate officers for failure to adequately oversee key management personnel charged with making and keeping accurate books and records, and devising and maintaining an adequate system of internal controls. As with the Nature’s Sunshine settlement, In re Dow highlights the importance of directors and officers insisting that their corporation operate under a robust anticorruption program supported by well-defined and thoroughly implemented policies and procedures.

McGuireWoods’ Government, Government, Regulatory and Criminal Investigations Department has attorneys with extensive experience conducting FCPA/anticorruption risk assessments, audits and investigations, as well as designing and helping to implement overall and FCPA/anticorruption-specific corporate compliance programs and training. The most valuable weapons a corporation and its officers and directors have against potential FCPA/anticorruption issues are preparedness, responsiveness and the deployment of a robust compliance program designed to identify, address and prevent issues before they become government investigations.