Recent Delaware Court of Chancery Decision Sustains Another Caremark Claim at the Pleading Stage

A board of directors has one job: managing risk. Everything they do, selecting, overseeing, compensating, and replacing top management, setting overall strategy, balancing competing interests, is all in service to sustainable growth of the business. Terms like “mission-critical” are just a reflection of that principle.

After decades of routinely dismissing such claims, Vice Chancellor Laster’s recent 41-page decision in Hughes v. Hu represents the third time since the Delaware Supreme Court’s decision last year in Marchand v. Barnhill that the Court of Chancery has sustained a Caremark duty of oversight claim at the pleading stage.

It remains unlikely that these recent decisions signal some change in the law, but rather reflect allegations of unique or extreme examples of certain corporate behavior. That said, these cases serve as a reminder of the importance of active, engaged board oversight of “mission critical” risk and compliance issues, and boards should take proactive steps to ensure that directors do not face personal liability for a failure of oversight.

Caremark claims, which allege failures of board oversight, have long been regarded by Delaware courts as “possibly the most difficult theory in corporation law upon which a plaintiff might hope to win a judgment.” To plead and prove a Caremark claim, a stockholder plaintiff must show that the board either (i) “utterly failed to implement any reporting information restrictions or controls”; or (ii) having implemented them, “consciously failed to monitor or oversee their operations, thus disabling themselves from being informed of risks or problems requiring their attention.” Not surprisingly, these claims routinely fail at the pleading stage.

As we previously discussed in our Horizon 2020 report, however, the Delaware Supreme Court last year reversed a Court of Chancery decision and held that a case brought under the first Caremark prong could proceed against the directors of Blue Bell Creameries, one of the nation’s largest ice cream manufacturers, following a deadly 2015 listeria outbreak. [1] The Court ruled that the complaint had alleged facts from which it could be inferred that Blue Bell’s directors had failed to put in place a board-level oversight system for food safety—which was “mission critical” for the monoline company—and as a result had not received official notices of food safety concerns for several years.

Recent Delaware Court of Chancery Decision Sustains Another Caremark Claim at the Pleading Stage

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