Gail Weinstein is senior counsel and Steven Epstein and Mark H. Lucas are partners at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank memorandum by Ms. Weinstein, Mr. Epstein, Mr. Lucas, Erica Jaffe, Shant P. Manoukian, and Roy Tannenbaum, and is part of the Delaware law series; links to other posts in the series are available here. Related research from the Program on Corporate Governance includes Monetary Liability for Breach of the Duty of Care? by Holger Spamann (discussed on the Forum here).
The Boeing Company Derivative Litigation (Sept. 7, 2021) is another in a series of cases in recent years in which the Delaware Court of Chancery has found, in the wake of a “corporate trauma” relating to product safety issues, that the company’s independent directors may have personal liability to the stockholders, under the “Caremark doctrine,” for a failure to have overseen management of the corporation’s core risks. In the Boeing opinion, Vice Chancellor Zurn echoes a number of themes from other recent cases involving so-called “Caremark claims,” and thus provides important guidance with respect to best practices for directors in fulfilling their oversight responsibilities (as discussed in “Practice Points” below).
Key Points
- In recent years, the Delaware courts, at the pleading stage of litigation, have more frequently rejected dismissal of Caremark claims against directors. The express articulation of the standard for pleading a valid Caremark claim has not changed and the courts continue to characterize these claims as among the most difficult upon which a plaintiff might hope to succeed. Also, importantly, each of the recent cases has presented a particularly egregious factual context. Nonetheless, directors should be mindful that, unlike in the past, there is now a trend of decisions in which the court has rejected early dismissal of Caremark
- Plaintiffs’ increased success in Caremark claims surviving the pleading stage is attributable to their more frequent use of books and records demands. With the courts more often granting stockholders’ demands under DGCL Section 220 for inspection of the corporate books and records, and the courts more often granting expansive access to the corporate books and records, stockholder-plaintiffs have been able to uncover information that has helped them craft more particularized pleadings substantiating their claims of lack of board oversight.
- Recent Delaware decisions provide specific guidance for directors in fulfilling their Caremark duties. Most critically, directors should understand that there is a board-level responsibility to oversee legal and regulatory compliance and other risks relating to the company’s “mission-critical” operations. It is not sufficient to delegate management of these critical risks to senior officers of the company. The oversight process with respect to these types of risks should be formally established and the board’s monitoring of the process should be well documented.
