Rising Oversight Suits Let Delaware Fill Gaps in Law, Judge Says

by Danica Brendon

In a recent panel discussion at the Delaware Governance Institute, Chancellor Kathaleen St. Jude McCormick, the chief judge of the Delaware Court of Chancery, highlighted the increasing number of claims from investors seeking accountability from company boards and executives. This rise in shareholder lawsuits has provided the court with an opportunity to address some “gray areas” in corporate law.

One significant development that Chancellor McCormick discussed was a 2019 Delaware Supreme Court decision that found a corporate board had failed to provide proper oversight, leading to a fatal listeria outbreak in Blue Bell ice cream. This ruling challenged the prevailing notion that lawsuits of this nature were difficult for shareholders to win, thereby acknowledging the legitimacy and potential success of such claims.

These types of shareholder lawsuits, known as “Caremark claims,” are centered around allegations that a company’s board of directors failed in its duty to implement and maintain proper oversight and compliance controls. They often arise when companies face legal or regulatory issues due to conduct that could have been prevented or detected earlier.

Chancellor McCormick emphasized that these claims are typically complex and challenging to prove, requiring plaintiffs to demonstrate both a sustained or systemic failure in a board’s oversight function and the resulting significant harm to the company. However, she acknowledged that recent cases have shown a greater willingness from the court to scrutinize board oversight, addressing the aforementioned “gray areas” that had previously made it difficult for shareholders to prevail.

The growing number of Caremark claims sheds light on investors’ increasing demand for transparency and accountability from corporate boards and executives. Shareholders are no longer willing to accept lapses in oversight that could potentially lead to significant harm to the company’s reputation and value.

As the Delaware Court of Chancery handles the majority of corporate law cases in the United States, its approach to Caremark claims carries substantial weight. The court’s increased willingness to delve into these complex issues and hold boards accountable is likely to influence corporate governance practices nationwide.

This heightened scrutiny puts added pressure on boards to ensure proper oversight and compliance mechanisms are in place. It serves as a reminder that directors have a fiduciary duty to act in the best interests of the company and its shareholders. Negligence or failures in fulfilling this duty could result in significant legal and financial consequences for both companies and their executives.

In conclusion, the increasing number of Caremark claims in recent years has provided the Delaware Court of Chancery with the opportunity to address and clarify important aspects of corporate law. As shareholders’ demand for accountability strengthens, boards and executives must prioritize effective oversight and compliance to safeguard their companies’ well-being. The court’s actions in this regard will shape corporate governance practices and legal standards moving forward.

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