D&O Blogger Kevin LaCroiz posts on the lawsuit against former Berkshire-Hathaway executive, who resigned after purchasing Lubrizol stock in advance of recommending that Berkshire acquire Lubrizol:
Over at the Delaware Corporate and Commercial Litigation Blog (here), esteemed fellow blogger Francis Pileggi has assembled a host of helpful links and commentaries about the lawsuit. (I would be remiss if I did not also mention here my thanks to Francis for his blog’s provision of a link to the Complaint, as well.) Among the more interesting sources he cites is UCLA Law Professor Stephen Bainbridge’s thorough analysis of the possible merits of the claim, which can be found here and here. ...
Professor Bainbridge’s analysis is interesting and persuasive. But it doesn’t answer what is for me the even more interesting question this lawsuit presents, which relates to the breach of fiduciary duty claim alleged against the Berkshire directors. Can the directors – or any one of them (say, for example, Buffett) possibly be held liable for failing to take actions that allegedly could have prevented supposed harm to the company?
First, thanks for the kind words. Second, I think the question LaCroix poses has an easy answer. To wit, no.
Beam ex rel. Martha Stewart Living Omnimedia, Inc. v. Stewart 833 A.2d 961 (Del.Ch. 2003), strikes me as being on all fours with the Sokol case. The Stewart case arose out of Martha Stewart's insider trading troubles. Plaintiff claimed that "the director defendants and defendant Patrick breached their fiduciary duties by failing to ensure that Stewart would not conduct her personal, financial, and legal affairs in a manner that would harm the Company, its intellectual property, or its business." (970-71) In other words, plaintiff claimed that the MSO directors failed to fulfill their Caremark duties by failing to prevent Stewart from engaging in insider trading.
The Chancellor opined that:
The “duty to monitor” has been litigated in other circumstances, generally where directors were alleged to have been negligent in monitoring the activities of the corporation, activities that led to corporate liability. Plaintiff's allegation, however, that the Board has a duty to monitor the personal affairs of an officer or director is quite novel. That the Company is “closely identified” with Stewart is conceded, but it does not necessarily follow that the Board is required to monitor, much less control, the way Stewart handles her personal financial and legal affairs.
And he continued by observing that "it is unreasonable to impose a duty upon the Board to monitor Stewart's personal affairs because such a requirement is neither legitimate nor feasible. Monitoring Stewart by, for example, hiring a private detective to monitor her behavior is more likely to generate liability to Stewart under some tort theory than to protect the Company from a decline in its stock price as a result of harm to Stewart's public image."
Maybe you could argue that Sokol's conduct is somewhat less personal, because he traded in stock of a company he knew he would be pitching to Berkshire as a takeover candidate. OTOH, however, Sokol is far less “'closely identified' with" Berkshire than Stewart was with MSO.
So I think there is zero chance that a Caremark claim against the directors of Berkshire-Hathaway.
For more on Caremark claims see my articles The Convergence of Good Faith and Oversight and Caremark and Enterprise Risk Management.
