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About this time last year, the Delaware Chancery Court made it clear that Caremark claims could be brought not only against corporate directors, but also against corporate officers. Recently, in Segway v. Hong Cai, (Del. Ch.; 12/23), the Chancery Court held that Caremark claims against corporate officers were subject to the same high pleading standards as those targeting corporate directors.

The case involved allegations that a former VP of Finance had breached her duty of oversight because “she knew or should have known there were potential issues with some of [the Company’s] customers, which caused [the Company’s] accounts receivable to continuously rise” and that she failed to address these issues or bring them to the attention of the board. Vice Chancellor Will dismissed the complaint, and this excerpt from a Sheppard Mullin blog on the decision explains her reasoning:

The Court of Chancery sided with the Officer, noting that the Company’s allegations are “an ill fit for a Caremark claim.” A plaintiff may state a claim for failure of oversight against a director or officer where such person acted in bad faith by (i) utterly failing to implement any reporting or information systems or controls; or (ii) having implemented such a system or controls, consciously failing to monitor or oversee their operations, including by ignoring red flags. And, with respect to officers, the scope of an officer’s duty of oversight would need to fall within the officer’s sphere of corporate responsibility.

The Court found that generic financial matters such as learning of issues with unspecified customers, revenue decreases, and increases in receivables “are far from the sort of red flags” that could trigger liability. The Company failed to allege facts that would suggest bad faith; rather the Company sought to have the Officer “answer for a decrease in sales and an increase in receivables” with the benefit of “20/20 hindsight.”

– John Jenkins