Board Liability under Caremark

Caremark is a notable Delaware Court decision establishing the principle that, while corporate directors are protected from suit based on errors made in good faith and without self-interest, directors nonetheless can be liable if they simply ignore significant corporate matters which ultimately injure their company.  It has been difficult in fact to find successful assertion of a breach of this duty to diligently supervise, however.  Last month, the Delaware Supreme Court again highlighted that difficulty.

Duke Energy suffered liability for numerous environmental violations.  The board was sued for  breach of its duty properly to supervise the response to this liability; suit was brought without a prior demand on the board to cure its actions on the theory that such demand would be futile under the statute.  Noting that the majority of the board consisted of independent directors, the Court found that the plaintiffs indeed failed to make a required demand as such demand would not have been necessarily futile.

It was conceded that the board was indeed aware of the environmental liability, even based on criminal activity.  But knowledge did not mean that the board permitted illegal behavior through failure to maintain sufficient internal controls.  Plaintiffs failed to establish at the pleading stage that the board knew that the company was ignoring the violations, even though the board knew of these violations.

The Court decision is facially startling.  One might expect a vigorous response on the record from an independent board knowing of criminal environmental wrongdoing.  The decision emphasizes the hesitancy of the Delaware Courts to affix liability to directors, not involved in self-dealing, based on their exercise of their judgment about how to handle all manner of issues. A dissent from one justice hearing the case would have decided the case differently, but clearly the extent of breach of duty is a matter of judgment resting in the eyes of the beholder, and directors seemingly can be pretty far off-base without incurring legal liability for their actions absent self-interest.

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