9/19/2023 0 Comments Lack of oversight![]() ![]() Barnhill in 2019, the Delaware Supreme Court concluded that a complaint stated a claim for lack of board oversight where food safety at an ice cream company was the “most central safety and legal compliance issue facing the company,” yet there was no board-level compliance reporting for food safety. These decisions suggest that directors may be more exposed to such claims than they have been in the past. In four cases alleging that boards failed in their duty of oversight, one decided by the Delaware Supreme Court, and three by the Court of Chancery, complaints have survived motions to dismiss. Then, things changed unexpectedly in 2019. In order to state a Caremark claim, a plaintiff must “plead with particularity that the board cannot be entrusted with the claim because a majority of the directors may be liable for oversight failures,” which is “extremely difficult to do.” 4 In fact, Delaware jurisprudence suggests that “the claim that corporate fiduciaries have breached their duties to stockholders by failing to monitor corporate affairs is ‘possibly the most difficult theory in corporation law upon which a plaintiff might hope to win a judgment.’” 5 As a result, oversight claims have been few and far between and, when such claims were brought, they rarely survived motions to dismiss. In the 25 years since Caremark was decided, the Delaware courts have repeatedly emphasized that claims for breach of the duty of loyalty premised on lack of oversight are exceedingly difficult to plead. Ritter, 2 the Caremark test imposes liability under two “prongs”: where “(a) directors utterly failed to implement any reporting or information system or controls or (b) having implemented such a system or controls, consciously failed to monitor or oversee its operations thus disabling themselves from being informed of risks or problems requiring their attention.” 3 Adopted a decade later by the Delaware Supreme Court in Stone v. Derivative Litigation, 1 establishing the conditions for director oversight liability under Delaware law. ![]() In 1996, the Delaware Court of Chancery issued its seminal decision in In re Caremark International Inc. ![]()
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