Caremark only requires a reporting and information system, not a reasonable one

Anne Tucker reports:

In early January, the Second Circuit Court of Appeals ruled in Cent. Laborers’ Pension Fund v. Dimon to affirm the dismissal of purported shareholder derivative claims alleging that directors of JP Morgan Chase--the primary bankers of Bernard L. Madoff Investment Securities LLC (“BMIS”) for over 20 years--failed  to institute internal controls sufficient to detect Bernard Madoff’s Ponzi scheme.  The suit was dismissed for failures of demand excuse.  Plaintiffs contended that the District Court erred in requiring them to plead that defendants “utterly failed to implement any reporting or information system or controls,” and that instead, they should have been required to plead only defendants’ “utter failure to attempt to assure a reasonable information and reporting system exist[ed].” (emphasis added).  The Second Circuit declined, citing to In re General Motors Co. Derivative Litig., No. CV 9627-VCG, 2015 WL 3958724, at *14–15 (Del. Ch. June 26, 2015), a Chancery Court opinion from earlier this year that dismissed a Caremark/oversight liability claim.  In In re General Motors the Delaware Chancery Court, found that plaintiffs' allegations that:

[T]he Board did not receive specific types of information do not establish that the Board utterly failed to attempt to assure a reasonable information and reporting system exists, particularly in the case at hand where the Complaint not only fails to plead with particularity that [the defendant] lacked procedures to comply with its . . . reporting requirements, but actually concedes the existence of information and reporting systems. . . .

In other words, the Plaintiffs complain that [the defendant] could have, should have, had a better reporting system, but not that it had no such system.

Caremark and Enterprise Risk Management | Hide Abstract | Download This Paper | Open PDF in Browser |  UCLA School of Law, Law-Econ Research Paper No. 09-08 Number of Pages in PDF File: 33	Bainbridge, Stephen M. University of California, Los Angeles (UCLA) - School of Law	Posted: 19 Mar 09	1,209 (10,286)	1
		Abstract:  The financial crisis of 2008 revealed serious and widespread risk management failures throughout the business community. Shareholder losses attributable to absent or poorly implemented risk management programs are enormous. Efforts to hold corporate boards of directors accountable for these failures likely will focus on so-called Caremark claims. The Caremark decision asserted that a board of directors has a duty to ensure that appropriate information and reporting systems are in place to provide the board and top management with timely and accurate information. Although post-Caremark opinions and commentary have focused on law compliance programs, risk management programs do not differ in kind from the types of conduct that traditionally have been at issue in Caremark-type litigation. Risk management failures do differ in degree from law violations or accounting irregularities. In particular, risk taking and risk management are inextricably intertwined. Efforts to hold directors accountable for risk management failures thus threaten to morph into holding directors liable for bad business outcomes. Caremark claims premised on risk management failures thus uniquely implicate the concerns that animate the business judgment rule's prohibition of judicial review of business decisions. As Caremark is the most difficult theory of liability in corporate law, risk management is the most difficult variant of Caremark claims. board of directors, risk management, enterprise risk management, oversight, Caremark

The Convergence of Good Faith and Oversight | Hide Abstract | Download This Paper | Open PDF in Browser |  UCLA School of Law, Law-Econ Research Paper No. 07-09 Number of Pages in PDF File: 52	Bainbridge, Stephen M. University of California, Los Angeles (UCLA) - School of Law Lopez, Star University of California, Irvine - School of Social Sciences Oklan, Benjamin University of California, Los Angeles - School of Law	Posted: 14 Aug 07	964 (14,672)	4
		Abstract:  In Stone v. Ritter, 911 A.2d 362 (Del. 2006), two important strands of Delaware corporate law converged; namely, the concept of good faith and the duty of directors to monitor the corporation's employees for law compliance. As to the former, Stone puts to rest any remaining question as to whether acting in bad faith is an independent basis of liability under Delaware corporate law, stating that although good faith may be described colloquially as part of a 'triad' of fiduciary duties that includes the duties of care and loyalty, the obligation to act in good faith does not establish an independent fiduciary duty that stands on the same footing as the duties of care and loyalty. Only the latter two duties, where violated, may directly result in liability, whereas a failure to act in good faith may do so, but indirectly. 911 A.2d at 370. Nevertheless, this holding may not matter much, because the Stone court makes clear that acts taken in bad faith breach the duty of loyalty. As a result, instead of being split out as a separate fiduciary duty, good faith has been subsumed by loyalty. In this sense, Stone looks like a compromise between those scholars and jurists who wanted to elevate good faith to being part of a triad of fiduciary duties and those who did not, with the former losing as a matter of form, and the latter losing as a matter of substance.  As to the duty of oversight, Stone confirmed former Chancellor William Allen's dicta in Caremark Int'l Inc. Deriv. Litig., 698 A.2d 959 (Del. Ch. 1996), that the fiduciary duty of care of corporate directors includes an obligation for directors to take some affirmative law compliance measures. In Stone, the Delaware Supreme Court confirmed that Caremark articulates the necessary conditions for assessing director oversight liability. Stone, 911 A.2d at 365.  This article argues that the convergence of good faith and oversight is one of those unfortunate marriages that leaves both sides worse off. New and unnecessary doctrinal uncertainties have been created. This article identifies those uncertainties and suggests how they should be resolved. corporation, corporate governance, board of directors, good faith, oversight, Caremark, Delaware corporate law