Litigation

Are Caremark Duties of Directors Real?

By Francis G. X. Pileggi, Esq.

One corporate law professor argues that the landmark Delaware Chancery Court decision in 1996 of In Re Caremark, describing a director's duty of oversight, was "dead upon enunciation" and it is, in practice, a Potemkin Village that never actually results in liability in light of the common "opt in" provision of DGCL Section 102(b)(7) that protects directors against claims that they violated their duty of care. Here is the commentary by Prof. Harry Gerla on The Race to the Bottom blog in a post entitled: Caremark: The Failed Revolution. He asserts that no Delaware court decision has found liability based on Caremark. But see the recent Chancery Court decision in Araneta, available here, that was interpreted by the nationally-prominent corporate law professor Gordon Smith as finding liability based on Caremark principles. Here is Prof. Smith's post on the case.

Prof. Eric Chiappinelli also offers his analysis here and similary reads Araneta as finding liability based on a Caremark claim which he describes as the basis for the liability of the two beholden directors for not monitoring the third director (and majority shareholder)--describing their breach of good faith for intentionally not taking action to fulfill their duties  as a breach of the duty of loyalty.

Prof. Bainbridge discusses Araneta  here at the tail end of his analysis of the recent Delaware Supreme Court's decision in Stone v. Ritter, and how it interfaces with the Supreme Court's decision to make oversight claims a la Caremark, into a breach of the fiduciary duty of loyalty as opposed to the duty of care--which he thinks is part of the court's inclination to gut DGCL section 102(b)(7).

Here is a "corporate cartoon" depicting the holding in Araneta. (It is wonderful to have an artist who helps to explain decisions involving Delaware corporate litigation through cartoons.) Also, see generally, Sample v. Morgan, (Del. Ch., Jan. 2007), a Chancery Court decision excoriating some directors for being "unwitting and uninformed accomplices" in an entrenchment scheme by other directors, available here.

Full post as published by Delaware Corporate and Commercial Litigation Blog on February 17, 2008 (boomark / email).