When a Whistleblower Complaint Becomes a Board-Level “Red Flag”

In a recent Caremark decision, the Delaware Court of Chancery largely denied a motion to dismiss, holding that most of Regions Bank’s board purportedly ignored red flags raised in a whistleblower report concerning the bank’s unlawful overdraft practices — practices that later led to the company paying $191 million in penalties and remediation to the Consumer Financial Protection Bureau (CFPB). The court found a former in‑house lawyer’s draft complaint sent to the board was a true red flag, and it held that merely engaging outside counsel to investigate, without timely corrective action, does not automatically defeat an inference of bad faith at the pleadings stage. The opinion underscores that both documented, prompt board‑level escalation and timely corrective action are critical as to compliance risks that are central to the business.

What the Court Decided

The stockholder derivative complaint alleged that, from 2018 to 2021, the company used illegal policies and practices to generate overdraft fees, culminating in a 2022 CFPB consent order requiring $191 million in payments. The court concluded that the plaintiff adequately pleaded demand on the board was futile, and thus excused, because most of the demand‑board faced a substantial likelihood of liability for ignoring “red flags” concerning the bank’s overdraft practices; as a result, the motion to dismiss based on demand futility was denied. At the same time, the court trimmed claims against certain directors whose service did not overlap with the red flags and dismissed officer‑level claims that were not defended in briefing.

Why the Whistleblower Complaint Mattered

A November 2019 draft complaint from a former senior in‑house lawyer to the board flagged, in concrete terms, why the overdraft‑fee practices risked violating federal law and described internal discussions about postponing changes until alternative revenue streams were identified. The court viewed the complaint — given the author’s role and the specificity — as a credible board‑level warning. By contrast, letters from legislators and CFPB actions toward other banks, standing alone, did not qualify as red flags to place the board on notice of risks associated with Regions Bank’s own overdraft policies.

Engaging Counsel Is a Good First Step, But More May Be Required

The board retained outside counsel to investigate after receiving the whistleblower letter. But the court emphasized that retaining lawyers is not a per se safe harbor: without timely, documented corrective action, counsel’s engagement alone will not defeat an inference of bad faith at the pleadings stage. And where the well‑pleaded record supports an inference of intentional delay in addressing practices alleged to be unlawful, that delay can itself support bad‑faith inferences.

Practical Takeaways for Boards and Committees

• Treat credible whistleblower reports as potential red flags. Ensure they are promptly elevated to the board or relevant committee, discussed on the record, and paired with a concrete action plan.
• Document the pivot from investigation to remediation. Minutes and materials should reflect a shift from awareness to remediation — not just documenting the flow of information or retaining outside counsel. This is especially important when the risk is core to the business.
• Beware “delay risk.” Where practices are plausibly unlawful, a plan that defers changes until alternative revenue is secured can be framed as intentional delay, supporting bad‑faith inferences. Move promptly and memorialize why timing choices were made.
• Expect Section 220 demands for records. Books-and-records productions can supply particularized facts that allow plaintiffs to plead demand futility and red-flag theories. Assume board materials will be read with that lens.

Procedural Update: Interlocutory Appeal

After the court’s September 29, 2025 memorandum opinion, defendants sought interlocutory review of the demand‑futility ruling. They argued that the court used the wrong pleading standard by assessing whether directors face a “substantial likelihood of liability” through the familiar Rule 12(b)(6) “reasonably conceivable” lens rather than via a distinct Rule 23.1 analysis. The Court of Chancery denied certification of an interlocutory appeal, explaining that the opinion applied Rule 23.1’s particularity requirement and, because the demand question turned on whether the red‑flags claim had “some merit,” evaluated that underlying claim using Rule 12(b)(6). The court noted many trial‑level decisions have taken a similar approach and acknowledged that the Delaware Supreme Court has not squarely addressed this specific formulation.

What to Watch for Next

Defendants have filed a notice of interlocutory appeal, and the Delaware Supreme Court has discretion to accept or decline review despite the chancery court’s denial of certification. If review is granted, the key issue likely would be the interplay between Rule 23.1’s particularity requirement and how courts assess “substantial likelihood of liability” at the pleading stage in red‑flags oversight cases.