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By :Alberto M. Longo

 

Regarded as “possibly the most difficult theory in corporation law upon which a plaintiff might hope to win a judgement[,]”[1] plaintiff stockholders generally face challenges in meeting the Caremark standard as it relates to oversight claims.[2] However, in the relatively recent case of Marchand v. Barnhill, the Delaware Supreme Court reminded corporate management of its duty of oversight by reversing the Court of Chancery’s dismissal of a derivative suit based on a Caremark claim against two key executives and directors of Blue Bell Creameries USA, Inc (“Blue Bell”).[3]

 

Blue Bell, as one of the country’s largest ice cream producers, sustained a listeria outbreak in early 2015 resulting in a shutdown of all its production facilities, significant employee layoffs, and a recall of its products.[4] As a result, Blue Bell encountered liquidity issues, forcing the company to seek “a dilutive private equity investment.”[5] In response, a stockholder filed suit in the Court of Chancery alleging the executives “breached their duties of care and loyalty by knowingly disregarding contamination risks and failing to oversee the safety of Blue Bell’s food-making operations, and that the director’s breached their duty of loyalty under Caremark.”[6]

 

Under Section 141(a) of the Delaware General Corporation Law, the board of directors is tasked with managing the day to day “business and affairs” of a corporation.[7] In doing so, “directors are charged with unyielding fiduciary duties” to make decisions in the best interest of the corporation and its stockholders.[8] Under Delaware law, it is no secret that these duties extend beyond specific instances of director action and include exercising general oversight over daily business operations.[9] To maintain their duty of oversight, directors must in good faith ensure “reasonable information and reporting systems exist”[10] to allow the board to make informed decisions concerning compliance and business performance.[11] “Failing to make that good faith effort can expose a director to liability.”[12] A lack of good faith is established when directors fail to implement systems of control or consciously fail to “monitor or oversee operations thus disabling themselves from being informed of risks or problems requiring their attention.”[13] Only a “sustained or systemic failure [by the board] to exercise control or monitor its operations” will result in director liability.[14] Put simply, directors, as part of the exercise of their business judgement and discretion are required to ensure compliance measures exist to insulate the corporation and its stockholders from corporate loss.[15]

 

In deciding to reverse the Court of Chancery, the Delaware Supreme Court determined “no system of board-level compliance monitoring existed at Blue Bell.”[16] Relying heavily on Caremark and Stone v. Ritter, the Court pointed out that although Blue Bell complied to some extent with FDA regulations, it does not necessarily mean that action was proactively taken at the board level to monitor food safety.[17] In fact, the Court further noted that “[a]t best, Blue Bell’s compliance with these requirements shows only that management was following, in a nominal way, certain standards of state and federal law.”[18]

 

Yet, a search of the books and records revealed that, prior to the listeria outbreak, the board failed to create a committee to address food safety.”[19] Furthermore, “no regular process or protocols that required management to keep the board apprised of food safety compliance practices, risks, or reports existed.[20] “No schedule for the board to consider on a regular basis, such as quarterly or biannually, any key food safety risks existed.”“the board meetings [were] devoid of any suggestion that there was any regular discussion of food safety issues.”[22]

 

Importantly, the decision in Marchand does not expand or limit the existing corporate doctrine concerning oversight liability.[23] What it does do, however, is remind directors that “[i]f Caremark means anything, it is that a corporate board must make a good faith effort to exercise its duty of care. . . [and that] failure to make that effort constitutes a breach of the duty of loyalty.”[24] Thus, at the board level, directors must be vigilant and ensure that they fulfill their fiduciary duties under Caremark by maintaining a reasonable board-level system of monitoring and reporting given the context of their business. By doing so, directors can significantly reduce the risk of oversight liability and act in a manner that is consistent with Delaware principles of fiduciary duty.

[1] In re Caremark Int’l Inc. Deriv. Litig., 698 A.2d 959, 967 (Del. Ch. 1996).

[2] See id.

[3] See Marchand v. Barnhill, 212 A.3d 805, 807 (Del. 2019).

[4] Id.

[5] Id.

[6] Id.

[7] See 8 Del. C. § 141(a).

[8] Cede v. Technicolor, 634 A.2d 345, 360, (Del. 1993).

[9] See Caremark, 698 A.2d at 971; see also Stone v. Ritter, 911 A.2d 362, 370 (Del. 2006).

[10] Caremark, 698 A.2d at 971.

[11] Id.

[12] Marchand, 212 A.3d at 824.

[13] Stone, 911 A.2d at 370–72.

[14] Caremark, 698 A.2d at 971.

[15] See id. at 969.

[16] Marchand, 212 A.3d at 823.

[17] Id.

[18] Id.

[19] Id. at 822.

[20] Id.

[21] Id.

[22] Id.

[23] Id. at 807.

[24] Id. at 824.