The WSJ reports that:
One of the largest makers of voting machines in the U.S. on Monday sued a prominent supporter of former President Donald Trump, alleging that the businessman had defamed the company with false accusations that it had rigged the 2020 election for President Biden.
Dominion Voting Systems sued Mike Lindell, chief executive of Minnesota-based MyPillow Inc., and his company in the U.S. District Court for the District of Columbia, seeking more than $1.3 billion in damages.
In its complaint, the company cites a number of statements made by Mr. Lindell, including in media appearances, social-media posts, and a two-hour film claiming to prove widespread election fraud.
I'm not sure whether My Pillow has minority shareholders or an independent board, but let's assume that it at least has some minority shareholders. If so, could those shareholders bring a Caremark claim against the board for failing to monitor CEO Lindell's political activities.
Directors are not expected to know, in minute detail, everything that happens on a day-to-day basis. Instead, a director is expected to have a rudimentary understanding of the firm’s business and how it works, keep informed about the firm’s activities, engage in a general monitoring of corporate affairs, attend board meetings regularly, and routinely review financial statements.[1] Beyond these obligations, the question remained as to whether boards have an obligation to monitor proactively the conduct of corporate subordinates.
In Caremark Int’l Inc. Deriv. Litig.,[2] Delaware Chancellor Allen opined that a board of directors in fact has an obligation proactively to take affirmative compliance measures:
[I]t would, in my opinion, be a mistake to conclude that our Supreme Court’s statement in Grahamconcerning “espionage” means that corporate boards may satisfy their obligation to be reasonably informed concerning the corporation, without assuring themselves that information and reporting systems exist in the organization that are reasonably designed to provide to senior management and to the board itself timely, accurate information sufficient to allow management and the board, each within its scope, to reach informed judgments concerning both the corporation’s compliance with law and its business performance. . . .
Thus, I am of the view that a director’s obligation includes a duty to attempt in good faith to assure that a corporate information and reporting system, which the board concludes is adequate, exists, and that failure to do so under some circumstances may, in theory at least, render a director liable for losses caused by non-compliance with applicable legal standards.
Even though Caremark was dicta and arguably inconsistent with supreme court precedent, it quickly became well accepted by the chancery court as good law.[3] Yet, for over a decade, the Delaware Supreme Court found no occasion on which to address squarely Caremark’s validity.
In Stone v. Ritter,[4] the Delaware Supreme Court confirmed that “Caremark articulates the necessary conditions for assessing director oversight liability.” In doing so, however, the court described Caremark as a case in which the operative standards are good faith and loyalty rather than care, stating that:
[T]he Caremark standard for so-called “oversight” liability draws heavily upon the concept of director failure to act in good faith. That is consistent with the definition(s) of bad faith recently approved by this Court in its recent Disney decision, where we held that a failure to act in good faith requires conduct that is qualitatively different from, and more culpable than, the conduct giving rise to a violation of the fiduciary duty of care (i.e., gross negligence). In Disney, we identified the following examples of conduct that would establish a failure to act in good faith: . . . where the fiduciary intentionally fails to act in the face of a known duty to act, demonstrating a conscious disregard for his duties.
The Court further explained that such an intentional failure “describes, and is fully consistent with, the lack of good faith conduct that the Caremark court held was a ‘necessary condition’ for director oversight liability, i.e., a sustained or systematic failure of the board to exercise oversight—such as an utter failure to attempt to assure a reasonable information and reporting system exists.”
As a practical matter, liability under Caremark and Stone has been most common where the board completely ignored compliance issues with respects to aspects of the business that are central to the company’s operations. Perhaps the closest case to My Pillow was posed in Beam ex rel. Martha Stewart Living Omnimedia, Inc. v. Stewart,[5] involving Martha Stewart’s alleged insider trading:
Defendant Martha Stewart (“Stewart”) is a director of the company and its founder, chairman, chief executive officer, and by far its majority shareholder. . . . Stewart, a former stockbroker, has in the past twenty years become a household icon, known for her advice and expertise on virtually all aspects of cooking, decorating, entertaining, and household affairs generally.
The market for [Martha Stewart Living Omnimedia, Inc. (“MSO”)] products is uniquely tied to the personal image and reputation of its founder, Stewart. MSO retains “an exclusive, worldwide, perpetual royalty-free license to use [Stewart’s] name, likeness, image, voice and signature for its products and services.” In its initial public offering prospectus, MSO recognized that impairment of Stewart’s services to the company, including the tarnishing of her public reputation, would have a material adverse effect on its business. . . . In fact, under the terms of her employment agreement, Stewart may be terminated for gross misconduct or felony conviction that results in harm to MSO’s business or reputation but is permitted discretion over the management of her personal, financial, and legal affairs to the extent that Stewart’s management of her own life does not compromise her ability to serve the company.
Stewart’s alleged misadventures with ImClone arise in part out of a longstanding personal friendship with Samuel D. Waksal (“Waksal”). Waksal is the former chief executive officer of ImClone. . . . Waksal and Stewart have provided one another with reciprocal investment advice and assistance, and they share a stockbroker, Peter E. Bacanovic (“Bacanovic”) of Merrill Lynch. . . . The speculative value of ImClone stock was tied quite directly to the likely success of its application for FDA approval to market the cancer treatment drug Erbitux. On December 26, Waksal received information that the FDA was rejecting the application to market Erbitux. The following day, December 27, he tried to sell his own shares and tipped his father and daughter to do the same. Stewart also sold her shares on December 27. . . . After the close of trading on December 28, ImClone publicly announced the rejection of its application to market Erbitux. The following day the trading price closed slightly more than 20% lower than the closing price on the date that Stewart had sold her shares. By mid-2002, this convergence of events had attracted the interest of the New York Times and other news agencies, federal prosecutors, and a committee of the United States House of Representatives. Stewart’s publicized attempts to quell any suspicion were ineffective at best because they were undermined by additional information as it came to light and by the other parties’ accounts of the events. Ultimately Stewart’s prompt efforts to turn away unwanted media and investigative attention failed. Stewart eventually had to discontinue her regular guest appearances on CBS’ The Early Show because of questioning during the show about her sale of ImClone shares. After barely two months of such adverse publicity, MSO’s stock price had declined by slightly more than 65%. In August 2002, James Follo, MSO’s chief financial officer, cited uncertainty stemming from the investigation of Stewart in response to questions about earnings prospects in the future. . . .
Count II of the amended complaint alleges 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.[6]
The court held that:
First, plaintiff does not allege facts that would give MSO's Board any reason to monitor Stewart's activities before mid–2002 when the allegations regarding her divestment of ImClone stock became public. Second, the quoted statement from Graham refers to wrongdoing by the corporation. Regardless of Stewart's importance to MSO, she is not the corporation. And 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.
Even if I accept that the board knew that Stewart's personal actions could result in harm to MSO, it seems patently unreasonable to expect the Board, as an exercise of its supervision of the Company, to preemptively thwart a personal call from Stewart to her stockbroker or to fully control her handling of the media attention that followed as a result of her personal actions, especially where her statements touched on matters that could subject Stewart to criminal charges. Plaintiff has not cited any case to support this new “duty” to monitor personal affairs. Since the defendant directors had no duty to monitor Stewart's personal actions, plaintiff's allegation that the directors breached their duty of loyalty by failing to monitor Stewart because they were “beholden” to her is irrelevant. Count II is dismissed for failure to state a claim.[7]
In a subsequent opinion, the Delaware Chancery Court again held that “directors of Delaware corporations generally have no duty to monitor the personal affairs of other directors and officers.[8]
Some observers, however, have raised the question of whether subsequent social and legal developments make it increasingly likely that private misconduct by executives will lead to viable Caremarkclaims. In a post-#MeToo article, however, Tom Lin argued that Caremark oversight duties continue to “present difficult issues concerning the monitoring of executive private behavior.”[9] He explained:
First, because of the high bar for attaching liability pursuant to a director's Caremark duties, directors bear little risk for not aggressively monitoring the private affairs of their fellow executives. Even if such matters are subject to some oversight, reasonable attempts that do not “utterly” or “consciously” fail is all that the law requires of directors. In fact, the court in Caremark stated that these types of cases may “possibly [represent] the most difficult theory in corporation law upon which a plaintiff might hope to win a judgment.” As such, companies have not bolstered their compliance and oversight of executive private conduct as much as they have in other corporate areas because there is little risk of liability and there remain open questions about whether the executive private matters should even be subject to corporate monitoring.
Second, creating and sustaining systems to oversee executive private conduct may be highly undesirable and impractical. After all, which senior executive is happy to subject themselves to being monitored by their fellow executives? Furthermore, it would be difficult to establish a surveillance system for senior executives concerning their private conduct, given the wide range of private travel and behaviors. This is to say nothing of the norms of collegiality, privacy, and legality that may be breached as a result of such a corporate surveillance system.[10]
[1] See Grimes v. Donald, 1995 WL 54441 at *8 n.6 (Del.Ch.1995) (stating that a board meets “its management responsibilities by appropriately appointing and monitoring, corporate officers and exercising informed business judgment with respect to corporate goals and performance”), aff’d on other grounds, 673 A.2d 1207 (Del.1996); see also American Bar Ass’n, supra note 2, at 1582 (stating that the duty of care requires directors “to become and remain generally informed, including doing the ‘homework’ of reading materials and other preparation in advance of meetings in order to participate effectively in board deliberations”).
[2] 698 A.2d 959 (Del.Ch.1996).
[3] See, e.g., Guttman v. Huang, 823 A.2d 492, 506 (Del.Ch.2003) (opining that “the Caremark decision is rightly seen as a prod towards the greater exercise of care by directors in monitoring their corporations’ compliance with legal standards”).
[4] 911 A.2d 362 (Del.2006).
[5] 833 A.2d 961 (Del. Ch. 2003), aff’d, 845 A.2d 1040 (Del. 2004).
[6] Id. at 966–71. Stewart eventually was convicted not of insider trading but rather of obstruction of justice and jailed for five months. She later settled SEC insider trading allegations.
[7] Beam ex rel. Martha Stewart Living Omnimedia, Inc. v. Stewart, 833 A.2d 961, 971–72 (Del. Ch. 2003), aff'd, 845 A.2d 1040 (Del. 2004).
[8] Canadian Com. Workers Indus. Pension Plan v. Alden, 2006 WL 456786, at *7 (Del. Ch. Feb. 22, 2006). For commentary on the issue, see Joan MacLeod Heminway, Martha's (and Steve's) Good Faith: An Officer's Duty of Loyalty at the Intersection of Good Faith and Candor, 11 Transactions: Tenn. J. Bus. L. 111 (2009); Jeffrey Sagalewicz, The Martha Duty: Protecting Shareholders from the Criminal Behavior of Celebrity Corporate Figures, 83 Or. L. Rev. 331 (2004)
[9] Tom C.W. Lin, Executive Private Misconduct, 88 Geo. Wash. L. Rev. 327, 361 (2020).
[10] Id. at 360-61.
