A new post at CLS Blue Sky Blog reports on recent Caremark decisions suggesting "that directors may be more exposed to such claims than they have been in the past." The authors conclude that these cases "highlight the critical importance of establishing and monitoring company reporting systems for 'essential and mission critical' compliance risk."
All of which leads Skadden to speculate that:
Despite two and a half decades of Caremark decisions stressing the high bar for pleading a breach of the duty of loyalty premised on oversight liability, the recent decisions from the Delaware courts indicate a willingness to entertain well-pled oversight claims involving “essential and mission critical” issues for a company’s compliance risk. While these cases repeat the prior court statements about how difficult these claims are to plead, they suggest that, in practice, that may no longer be the case.
Regular readers, of course, will recall my article Don’t Compound the Caremark Mistake by Extending it to ESG Oversight (September 2021), forthcoming in Business Lawyer (2022). Available at SSRN: https://ssrn.com/abstract=3899528, in which I argue that:
Since the foundational decision in In re Caremark Intern. Inc. Derivative Litig., 698 A.2d 959 (Del. Ch. 1996), Delaware corporate law has required boards of directors to establish reasonable legal compliance programs. Although Caremark has been applied almost exclusively with respect to law and accounting compliance, the original Caremark decision contemplated applying the oversight duty to the corporation’s “business performance.” Accordingly, there is no doctrinal reason that Caremark claims should not lie in cases in which the corporation suffered losses, not due to a failure to comply with applicable laws, but rather due to lax risk management.
The question thus arises as to whether Caremark should be extended to board failures to exercise oversight with respect to environmental, social, and governance (ESG) factors. Obviously, where existing legislation or regulations impose compliance obligations in ESG-related areas, such as human resources, the environment, or worker safety, Caremark already applies. As such, boards must “ensure that compliance and monitoring systems are in place” to oversee corporate compliance with those laws.
Many ESG issues are not yet the subject to legal requirements, however. The question addressed in this Article is whether the board’s Caremark obligations should be extended to encompass oversight of corporate performance with such issues. In other words, should the board face potential liability not just for failing to ensure that the company has adequate reporting and monitoring systems in place to insure compliance with ESG-related legal requirements, but also to monitor ESG risks in areas where corporate compliance would be voluntary or aspirational.
Ideally, of course, I'd like to see Caremark reversed and for Delaware to return to the Graham v. Allis-Chalmers regime, but I'm not holding my breath. At the very least, however, we need to stop expanding it.