August 12, 2022

Caremark: Lessons for Boards From Recent Delaware Cases

We’ve blogged quite a bit over the past several years about the Delaware courts’ increasingly sympathetic approach to Caremark claims and their increasingly demanding view of what’s necessary for directors to fulfill their oversight responsibilities. This Wachtell memo addresses the implications of recent Caremark decisions. This excerpt discusses the role that books & records requests play in Caremark litigation and the resulting importance of properly structuring and documenting the board’s oversight efforts:

The increasing use of books and records demands by plaintiffs to plead their claims has been illustrated. Because the Delaware courts have long made clear—including in Marchand and Boeing—that Caremark requires a good faith effort by the board, not perfection, and that the board will only face liability if the evidence demonstrates that a board has not made a good faith effort to fulfill its duties, plaintiffs have sought books and records to sustain their difficult burden to plead a viable claim. When these books and records do not reflect that a company had in place a board structure that attended to core business and legal risks, the plaintiffs cite to that lack of effort in an effort to plead a complaint that cannot be dismissed on motion.

For these reasons, we have urged that companies ensure that their board-level committee structures address all mission critical risks and that the board’s efforts in holding meetings and receiving information in aid of its monitoring responsibilities are well documented. Taking these steps are beneficial on several levels. Most important, tone and involvement at the top on important compliance matters helps companies best position themselves to function safely and lawfully.

Because managing complex business entities invariably involves risks, these actions are also helpful in the event that something goes wrong despite the company’s good faith efforts at prevention. A documented board-level compliance system makes it much more difficult for a plaintiff to plead a viable Caremark claim. With increased attention to these subjects, two-thirds of the Caremark cases filed after Marchand have been dismissed on motion.

The blog goes on to discuss the role that proper structuring & documentation of the board’s oversight of mission critical played in Chancellor McCormick’s dismissal of Caremark claims in City of Detroit Police & Fire Retirement System v. Hamrock, (Del. Ch.; 6/22). It concludes by observing that Hamrock underscores the conclusion that directors face a very limited risk of personal liability if they “use their business judgment and work with management to put in place and attend in good faith to a sound compliance structure that addresses the company’s central risks, and documents its efforts in doing so.”

Wachtell Lipton will be well represented at our upcoming “Proxy Disclosure & 19th Annual Executive Compensation Conferences.”  Former Delaware Chief Justice Leo Strine, who is currently Of Counsel at Wachtell, will participate in our “ESG Disclosures: Staying Out of Hot Water” panel & Wachtell Partner Sabastian Niles will participate in our “Next-Gen Activism: Are You Prepared?” panel.  You won’t want to miss these or the other informative topics on our agenda, so be sure to sign up online, email, or call 1-800-737-1271.

John Jenkins