TheCorporateCounsel.net

Last month, the WSJ published a report on Elon Musk’s drug use which noted concerns among board members and company executives about his behavior’s potential implications for his companies. Since the report makes it clear that Musk’s directors & executive officers are aware of this behavior, a recent blog from UCLA’s Stephen Bainbridge discussed whether their oversight responsibilities under Caremark might be implicated if they fail to take action. As this excerpt from his blog explains, Prof. Bainbridge doesn’t believe that directors & executive officers would face liability in this situation:

[W]hat liability exposure does the board have when it is aware of a problem and decides to do nothing? I think the answer should be that the board would not be held liable. Granted, a board can be held liable for acting in bad faith not only for acting with “’subjective bad faith,’ that is, fiduciary conduct motivated by an actual intent to do harm” to the corporation, In re Walt Disney Co. Derivative Litig., 906 A.2d 27, 64 (Del. 2006), “but also intentional dereliction of duty.” Lyondell Chem. Co. v. Ryan, 970 A.2d 235, 240 (Del. 2009).

At least on these facts, however, I doubt whether a board decision to do nothing would rise to the level of “intentional dereliction of duty.” First, as VC Will explained, The Caremark doctrine is not a tool to hold fiduciaries liable for everyday business problems. Rather, it is intended to address the extraordinary case where fiduciaries’ “utter failure” to implement an effective compliance system or “conscious disregard” of the law gives rise to a corporate trauma. … Officers’ management of day-to-day matters does not make them guarantors of negative outcomes from imperfect business decisions.” Hence, even if the board’s decision not to act was “imperfect” that board cannot be held liable as “guarantors of negative outcomes.”

Second, as I discussed at considerable length in my post My Pillow, Inc. and the perennial question of whether Caremark claims should lie when boards fail to monitor the CEO’s personal life, the Delaware courts have held in several cases that ““directors of Delaware corporations generally have no duty to monitor the personal affairs of other directors and officers.” Granted, saying there is no duty to monitor such affairs is not the same as saying that there is no duty to intervene when such affairs are brought to the board’s attention, but it tends to support the proposition that the board has little liability exposure in this area.

Prof. Bainbridge also pointed out that, related to his first point, Delaware courts have held that while the business judgment rule doesn’t have any bearing on a claim that the directors’ inaction was the result of ignorance, it does apply to a conscious decision not to act, which he thinks this case would seem to involve.

– John Jenkins