I'm about to teach Stone v. Ritter for the first time. By the time we get there, my students will have already read Caremark. As I read Caremark, it is a case about whether "unconsidered inaction" on the part of the board of directors gives rise to liability under the duty of care. In Stone v. Ritter, however, the Delaware Supreme Court seems to have transformed the Caremark standard of review into one arising under the obligation of good faith. In turn, good faith is subsumed into loyalty. This is odd.
The doctrinal and remedial aspects of the duty of loyalty have little relevance to Caremark claims. First, the relevant factual issues go not to fairness but to negligence and errors of judgment. Instead, these are precisely the sorts of issues the duty of care was designed to address. Second, the duty of loyalty’s remedies, such as a constructive trust or rescissory damages make no sense in this context. The goal of such remedies in loyalty cases is to ensure that the wrongdoer retains neither its ill-gotten gains nor their tainted fruits. In cases like Stone, however, an award of rescissory damages would have the effect of ordering the defendant directors to return a benefit that they never received. By definition there are no ill-gotten gains to be recouped.
But here's what's really bothering me as I get ready to go teach this mess. In Stone, the court stated that:
We hold that Caremark articulates the necessary conditions predicate for director oversight liability: (a) the directors utterly failed to implement any reporting or information system or controls; or (b) having implemented such a system or controls, consciously failed to monitor or oversee its operations thus disabling themselves from being informed of risks or problems requiring their attention. In either case, imposition of liability requires a showing that the directors knew that they were not discharging their fiduciary obligations.
If I'm right that the Caremark "duties" are about "unconsidered inaction," the clearest cases for Caremark-based liability would be where “there was an unconsidered failure of the board to act in circumstances in which due attention would, arguably, have prevented the loss.”
This is so, Caremark clearly suggests, because the business judgment rule has no application where the board failed to exercise business judgment. The paradigm case for director liability thus was a board, such as the defendant board in Caremark itself, which over a sustained period of time simply failed to even consider whether a law compliance program was necessary.
Yet, by requiring “a showing that the directors knew that they were not discharging their fiduciary obligations,” the Stone court seemingly would allow such a board to escape liability. Right? Would a clueless board that just sort of drifted along for years with unconsidered inaction escape liability? Is ignorance really bliss?
