In an earlier post, I discussed Hughes v. Hu, which is the latest in a set of cases in which Caremark claims survived a motion to dismiss. Kevin La Croix has also written about the case, with a typically detailed and thoughtful post. (My thanks to Counselor LaCroix for kindly linking my post.) As LaCroix points out, the facts in this case are especially egregious:
The three recent Delaware decisions taken collectively serve to underscore the conclusion that under Delaware law corporate directors have a fiduciary duty to oversee their companies by creating and implementing systems of control and by monitoring the company’s management and operations, and that the failure to take these steps could result in the imposition of personal liability.
In analyzing the issues presented in the most recent case, it is clear that Vice Chancellor was most concerned about the defendants’ response to previously revealed problems. As the company’s 2013 10-K disclosed, the company and its directors and officers were already on notice that the company had problems with its internal controls and financial reporting, particularly with respect to related party transactions.
As Vice Chancellor Laster noted, despite these prior developments, “the allegations in this case support inferences that the board members did not make a good faith effort to do their jobs.”
The take home lesson I draw from that observation is that if you have problems big enough to warrant mentioning in your 10-K, FIX THEM!
LaCroix also points out the case has COVID-19 implications:
These developments may be particularly relevant now, as we anticipate claims that may arise in connection with the current coronavirus outbreak. The possibility that adverse company developments might result in breach of the duty of oversight claims has been a topic of discussion, particularly with respect to the first of the three recent Delaware duty of oversight cases, Marchand v. Barnhill.
Marchand involved a food manufacturer whose operations were shut down after a listeria outbreak resulted in the deaths of three customers. Because of the health related aspect of the underlying business problem and because of the resulting shut down, some commentators have suggested that the case might point toward future oversight breach cases arising out of the pandemic. The Duane Morris Business Law Blogto which I linked at the outset of this post notes that in light of these oversight duty concerns during the current coronavirus outbreak, “directors and officers have created and are implementing adequate controls and monitoring to avoid the potential that unforeseen events” might arise and lead to their potential liability.
But go read the whole thing.
