In June 2019, the Delaware Supreme Court issued a decision that signaled a potential departure from the court’s existing thinking on oversight liability for boards of directors. The court in Marchand v. Barnhill held that a plaintiff’s claims against directors for their alleged failure to oversee operations at an ice cream manufacturer, leading to a listeria outbreak and three deaths, could go forward. So-called Caremark claims are named for the Court of Chancery’s 1996 decision that held that directors could be liable for the breach of the duty of loyalty if they “consciously disregarded” their fiduciary duties and utterly failed to implement a functioning oversight system. However, since the Caremark decision, few oversight claims have proceeded past the motion to dismiss stage. In the wake of Marchand, practitioners wondered whether Delaware courts would more frequently allow Caremark cases to proceed into discovery.
Since Marchand, decisions by Delaware courts on Caremark claims have largely been a mixed bag. Although the Court of Chancery has since issued a few decisions denying motions to dismiss Caremark claims on demand futility grounds—thereby permitting such claims to go forward—Marchand has not led to a wide-scale shift in jurisprudence on oversight issues. Rather, the decisions of Delaware courts in this arena have been heavily fact-driven and context-specific, due in part to an increasing number of these cases being litigated with the corresponding decline in mergers and acquisition litigation.
In this article, we explore Marchand and the cases that followed. In doing so, we seek to identify key factors that distinguish complaints that survive from ones that do not, and offer insight to guide companies and their directors attempting to navigate this area of the law. As Vice Chancellor Sam Glasscock III aptly noted in the recent Moneygram case, “bad oversight is not bad-faith oversight,” with only the latter triggering liability under Caremark. This article seeks to explore that critical line between “bad-faith oversight” and mere “bad oversight.”
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