Caremark Duties Include Duty Not Only to Establish Oversight Processes but Also to Monitor Them

In Marchand v. Barnhill, 212 A.2d 805 (Del. 2019) the Delaware Supreme Court held that boards that fail to implement oversight procedures for their company’s mission critical functions can be held liable for breach of their fiduciary duty, reversing and remanding the Delaware Chancery Court’s dismissal of the case. See Marchand v. Barnhill, C.A. No 2017-0586-JRS, 2018 WL 4657159 (Del. C. Sept. 27, 2018). In a recent decision on October 1, 2019, the Delaware Chancery Court provided additional perspective on directors’ potential liability for breaches of the duty of oversight. 

In In re Clovis Oncology, Inc. Derivative Litigation, C.A. No 2017-0222-JRS (Del. C. Oct. 1, 2019), the Delaware Chancery Court provided additional color on directors’ potential liability for breach of the duty of oversight. The Chancery Court held, citing Marchand, that a board of directors not only must be able to demonstrate good faith efforts to implement an oversight system, but also that the board monitors the system – especially when the company operates in a highly regulated industry. The Marchand decision and its progeny, Clovis Oncology, “underscores the importance of the board’s oversight function when the company is operating in the midst of a ‘mission critical’ regulatory compliance program.” The court in Clovis Oncology noted that Marchand “makes clear” that where a company operates in a “mission critical” regulatory environment, “the board’s oversight function must be more rigorously exercised.” In summary, having a compliance system is not enough; the board must implement procedures in place to “ensure that the board itself monitors ‘mission control’ corporate risks.” These rulings give the board, management and shareholders additional guidance for potential director liability for oversight claims.

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