In Segway, Inc. v. Cai, the Delaware Court of Chancery concluded that an officer does not face oversight liability (commonly referred to as a Caremark claim) for alleged inattention to day-to-day business matters or routine business risks. The decision is important because it helps clarify the types of claims officers of Delaware corporations may face with regard to business risks and legal compliance.  In this case, the court flatly rejected Segway, Inc.’s (Segway or the Company) theory that “everyday business problems” could constitute a fiduciary’s breach of the duty of oversight or that there is a lower pleading standard when a Caremark claim is brought against an officer as opposed to a director. Instead, the Court confirmed the “enduring principles” of the Caremark doctrine that “[l]iability can only attach in the rare case where fiduciaries knowingly disregard [their] oversight obligation and trauma ensues.”

Background

Defendant Cai (Cai) became President of the Company in 2015. At the same time, Cai maintained responsibilities of her prior role as Segway’s in-house accountant. Following an acquisition by a Chinese startup (Ninebot), Segway largely continued its business as it did pre-merger, including maintaining the Company's Board of Directors and officers. The Company’s business prospects, however, declined leading to layoffs. As a result, Cai was terminated as President in 2020. After her departure, Segway discovered discrepancies in the financial data it provided to Ninebot, including “an excess of $5 million in accounts receivable that were ‘not properly recorded and/or booked.’”

Segway filed suit against Cai asserting a Caremark claim arguing that officers could be found liable for a Caremark oversight breach merely for failing to recognize business risk without any allegations of bad faith. The Company alleged that Cai breached her fiduciary duty by “consciously disregarding certain financial discrepancies” and “willfully ignored” issues in the Company’s accounting records. Cai move to dismiss, which the court granted in its entirety. 

The Court’s Decision

First, regarding Segway’s claim that Cai’s conduct implicated the duty of oversight, the Court held that Segway failed to plead that Cai “consciously failed to act after learning about evidence of illegality—the proverbial ‘red flag’ within her areas of responsibility.” The court observed that the allegations in the complaint did not claim that “Cai overlooked accounting improprieties, fraudulent business practices, or other material legal violations.” Thus, the accounts receivable issue constituted “generic financial matters [] far from the sort of red flags that could give rise to Caremark liability if deliberately ignored.”

The court further clarified that a Caremark claim is intended to address only “the extraordinary case where fiduciaries’ ‘utter failure’ to implement an effective compliance system or ‘conscious disregard’ of the law gives rise to a corporate trauma.” Therefore, the court rejected Segway’s argument that a lower standard should apply to officers, and expressly held that for officers, like directors, a Caremark claim requires that “the officer failed to make a good faith effort to monitor central compliance risk within her remit that pose potential harm to the company or others.” 

Takeaways

A Caremark claim requires a plaintiff to establish that a director or officer must knowingly disregard their obligations to the company in a way that causes damage far beyond “unexceptional financial struggles.”