Last fall, John blogged about a Caremark claim surviving a motion to dismiss. This was a big deal because at the time it was the second case in a year that the Delaware courts declined to dismiss at the pleading stage following decades of routinely doing so. Now, earlier this week the Delaware Court of Chancery issued a 41-page opinion in Hughes v. Hu and declined to dismiss another Caremark claim.
In the most recent case, Vice Chancellor Laster held that the plaintiff adequately pled that the director defendants, who served on the company’s audit committee, breached their fiduciary duties by failing to oversee the company’s financial statements and related party transactions. The plaintiff alleged that the directors’ failures led to the company’s need to restate its financial statements, thereby causing the company harm.
Steve Quinlivan’s blog provides a nice summary, here’s an excerpt:
The Court found the allegations in this case support inferences that the board members did not make a good faith effort to do their jobs. The Audit Committee only met when spurred by the requirements of the federal securities laws. Their abbreviated meetings suggest that they devoted patently inadequate time to their work. Their pattern of behavior indicates that they followed management blindly, even after management had demonstrated an inability to report accurately about related-party transactions.
For instance, documents that the Company produced indicated that the Audit Committee never met for longer than one hour and typically only once per year. Each time they purported to cover multiple agenda items that included a review of the Company’s financial performance in addition to reviewing its related-party transactions. On at least two occasions, they missed important issues that they then had to address through action by written consent. According to the Court, the plaintiff was entitled to the inference that the board was not fulfilling its oversight duties.
Last fall, John wondered whether Caremark was becoming a more viable theory of liability or the board’s conduct in recent cases was just more egregious. It’s still early…we’ll see if any other pleading-stage dismissals show up in 2020 to form more of a pattern.
The facts in Hughes seem pretty egregious and the Court’s opinion says the defendants face a substantial likelihood of liability under Caremark. But, as Steve Quinlivan notes at the end of his blog, the Court hasn’t found any of the defendants liable for the actions alleged in the complaint.
PCAOB Wants Comments on CAM Requirements
The PCAOB wants comments on experiences so far with the new CAM disclosure requirement. Comments are encouraged from all interested stakeholders and should be submitted by June 15, 2020. Information on the comment process can be found on this PCAOB Request for Comment. The Comment Request includes a list of questions for consideration and asks commenters to provide data, evidence or other specific examples to support comments.
The PCAOB says it’s conducting an interim analysis to understand how auditors responded to the CAM requirements, how investors are using CAM disclosures and audit committee and preparer experiences. From there, the PCAOB will consider whether additional guidance or other steps may be appropriate. The PCAOB plans to report its interim review findings toward the end of the year.
Speaking of CAMs, according to a recent Audit Analytics’ blog, so far disclosure of the audit committee’s role regarding CAMs isn’t too prevalent. The blog says the firm reviewed 770 S&P 1500 proxy statement disclosures filed between July 1, 2019 and March 31, 2020 to look for disclosures about the audit committee’s role with CAMs.
Of course, the new disclosure requirement relating to CAMs requires auditors to share any CAMs with the audit committee as part of the draft auditor report, but the audit committee doesn’t need to approve or determine CAMs. So, even though there’s been a trend of expanding audit committee disclosure, audit committees wouldn’t necessarily need to say much about how they’re engaging in the new disclosure requirement – although the blog does say we’ll probably see more of this disclosure as time goes on. Here’s some of their findings:
In the first quarter 2020, they found slightly over 6% of S&P 1500 proxy statements filed included CAMs in audit committee disclosure – the majority of which included mention in the audit committee report of the proxy
Of proxy statements that included audit committee disclosure of CAMs, 61% were from the S&P 500 – although, overall most companies haven’t included this disclosure in proxy statements
When disclosure is included in the proxy statement, it often identifies the audit committee’s role as either reviewing the CAMs, discussing CAMs with the independent auditor or both
Our May Eminders is Posted!
– Lynn Jokela