The Caremark decision set a high bar for plaintiffs to scale in asserting a board’s failure to comply with the duty of care and loyalty standards. As Protiviti’s Jim DeLoach addresses, a 2019 decision applied that standard in ruling for the plaintiff on a critical operational risk matter.
A landmark case before the Delaware courts in 1996 was Caremark International. Inc. Derivative Litigation. The decision in Caremark clarifies the board’s duties in the context of its oversight activities. In that case, the shareholders of Caremark International Inc., in a derivative action, alleged that the company’s directors, in neglecting to effect sufficient internal control systems, breached their duty of care. Because of this neglect, the civil action alleged, Caremark employees were able to commit criminal offenses that resulted in significant fines and civil penalties of more than $250 million.[1]
In addressing a board’s oversight responsibility, the court outlined what a plaintiff must prove to demonstrate that directors breached their duty. Specifically, plaintiffs would have to show either (1) that the directors knew or (2) should have known that violations of law were occurring and, in either event, (3) that the directors took no steps in good faith to prevent or remedy…
