Ash v. McCall

In January 1999, McKesson Corporation and HBOC & Co. merged to form McKesson HBOC, Inc. (MergeCo). McKesson hired an expert accounting firm, DeLoitte Touche, and an expert investment bank, Bear Stearns, to conduct due diligence on HBOC and provide financial advice on the proposed transaction. The expert financial advisors reviewed HBOC’s books and records and recommended approval to the McKesson board of directors. The McKesson board then approved the merger. The board of directors of MergeCo was made up of six directors from McKesson and six directors from HBOC. A few months after the merger, MergeCo publicly issued a downward revision of its earnings for the prior three financial years to reflect material earnings overstatements by HBOC. A total of three downward adjustments were issued by MergeCo following the merger. Arlene Ash (plaintiff) was a shareholder of MergeCo and brought a derivative claim on behalf of MergeCo. The complaint alleged that McKesson’s and HBOC’s directors should have discovered the financial accounting issues during the pre-merger due-diligence process and thus had breached their duty of care by failing to inform themselves of all reasonably available information before approving the merger. The complaint did not allege, however, that the directors (1) had knowledge of any accounting issues or error in the experts’ review, (2) did not believe the experts were particularly qualified, (3) did not rely on the experts in good faith, or (4) should have detected the financial overstatements themselves because they were so obvious. Director Charles McCall (defendant) and the other director-defendants filed a motion to dismiss the claim.