Checking in on the Caremark Cases

Corruption Crime & Compliance

Over the last ten years, we have seen a marked shift from the Delaware Chancery Court chipping away at corporate board member liability claims. In a number of seminal cases involving Boeing airplane crashes (In re the Boeing Co. Derivative Litig., No. 2019-0907 (Del. Ch. Sept 7, 2021)), and deadly listeria outbreaks from tainted ice cream (Marchand v. Barnhill, 212 A.3d 805 (Del. 2019)), Delaware Courts have upheld plaintiffs' cases against claims of failing to adequately plead violations of the standards set forth in Caremark, 698 A.2d 959 (Del. Ch. 1996), (establishing basic pleading requirements to withstand motions to dismiss).

In this episode, Mike Volkov provides a comprehensive update on the recent Caremark decisions issued by the Delaware Chancery Court, underscoring their importance for accountability and governance in the corporate world.

• Caremark oversight duties stem from the well-established duty of loyalty and its subsidiary duty of good faith. To plead a Caremark claim, a plaintiff is required to put forth adequate facts from which a factfinder can make a reasonable inference that the fiduciary acted in bad faith.
• Under Caremark, bad faith can be established when a fiduciary: “(1) utterly fail[s] to implement any reporting or information system or controls," or (2) having implemented such a system or controls, consciously fail to monitor or oversee its operations, which results in a failure to act or attend to a risk or problem requiring their attention or response.
• Last year, the Chancery Court made a groundbreaking decision, extending the so-called Caremark oversight obligations and governance requirements to senior management in the McDonald's case. In re McDonald’s Corp. S’holder Derivative Litig., 289 A.3d 343 (Del. Ch. 2023). This ruling is one of the most significant developments in recent years, advocating for increased accountability for oversight and governance failures.
• Recent cases, such as the Boeing 737 MAX crashes and the Listeria outbreak from tainted Blue Bell ice cream, have highlighted failures in proper board governance and oversight responsibilities.
• In a case involving Segway, the Chancery Court dismissed a motion against an officer for failing to detect financial discrepancies, emphasizing the need to demonstrate a lack of good faith in monitoring central compliance risks.
• The trend in Delaware Chancery Court decisions is moving towards holding directors and officers accountable for failures to act in response to indications of potential illegal conduct, with a focus on bad faith actions.
• The Boeing case exemplifies the consequences of board members ignoring safety concerns and focusing solely on the bottom line, leading to tragic outcomes that could have been prevented with proper oversight and accountability.

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