Delaware law has long held that directors of Delaware corporations have a duty to be “reasonably informed concerning the corporation,” including overseeing the corporation’s operational viability, legal compliance, and financial performance. Recently, the Delaware Court of Chancery has extended the duty of oversight to include officers of Delaware corporations.
A plaintiff asserting a claim for violating this duty of oversight, commonly referred to as a Caremark claim, can attempt to show a failure under two theories:
- By showing leadership “utterly failed” to implement an effective compliance and reporting system; or, alternatively;
- By showing that the officers or directors instituted an obviously unreasonable or inadequate reporting system, or consciously failed to monitor or oversee the reporting system operations, thus disabling themselves from being informed of risks or problems requiring their attention.
In the last 25 years, Delaware courts have repeatedly emphasized that Caremark claims are difficult to plead and do not survive a motion to dismiss. However, since 2019, oversight claims have been more frequently pursued, have survived motions to dismiss, and, in some cases, resulted in considerable settlement payments.
Officers and directors of Delaware corporations should remain vigilant of their duty of oversight by putting adequate compliance and reporting systems in place and continuing to monitor those systems.