Jason J. Mendro and Andrew S. Tulumello are partners and Jason H. Hilborn is an associate at Gibson, Dunn & Crutcher LLP. This post is based on a Gibson Dunn memorandum by Mr. Hilborn, Mr. Mendro, Mr. Tulumello, Elizabeth A. Ising, Gillian McPhee and Ronald O. Mueller. This post is part of the Delaware law series; links to other posts in the series are available here.
In a recent decision applying the famous Caremark doctrine, the Delaware Supreme Court confirmed several important legal principles that we expect will play a central role in the future of derivative litigation and that serve as important reminders for boards of directors in performing their oversight responsibilities. In particular, the Delaware Supreme Court held that a claim for breach of the duty of loyalty is stated where the allegations plead that “a board has undertaken no efforts to make sure it is informed of a compliance issue intrinsically critical to the company’s business operation.”
Although the case addressed extreme facts that will have no application to most mature corporations, the plaintiffs’ bar can be expected to attempt to weaponize the decision. With all the benefits that hindsight provides, derivative plaintiffs will more frequently contend that a board lacked procedures to monitor “central compliance risks” that were “essential and mission critical.” The Supreme Court’s decision reinforces that directors need to implement controls that enable them to monitor the most serious sources of risk, and may even caution in favor of a special discussion each year around critical risks.
