Partner Beth Boland and associates Abby Drake and Andrew Howell were published in Agenda. The article, “Delaware Courts Usher in New Era of Compliance Duties by Corporate Boards,” discussed how two recent decision in Delaware courts reflect a marked shift in the approach to require boards to proactively identify the key risks faced by the company and review relevant metrics to ensure those risks are being addressed.
The article discussed the decision in Marchand vs. Barnhil in the Delaware Supreme Court where shareholders of Blue Bell Creameries sued the board after the company suffered a deadly listeria outbreak, even though management had never informed the board of the company’s long history of food safety violations. When confronted with the shareholder suit, the Delaware Chancery Court did what many courts before it had done since Caremark: It dismissed the suit at the pleading stage. This time, however, the Delaware Supreme Court disagreed and reversed the dismissal of the action, noting that the board did not systematically identify mission-critical risks such as food safety and develop a mitigation plan for those risks; did not have a committee to monitor food safety; and did not actively monitor management’s response to the crisis.
Boland, Drake and Howell also pointed out that the Delaware Chancery Court’s decision in In re Clovis Oncology, Inc. Derivative Litig. relied on Marchand to deny dismissal of stockholder claims based on the board’s alleged failure to oversee pharmaceutical clinical trials. According to the court, implementing an oversight system is not enough — directors must “then monitor it .” This lack of monitoring included the failure to correct management’s inaccurate reporting of results from clinical trials — which the court deemed “mission critical” to the company’s success — to keep up with a competitor.
Read “Delaware Courts Usher in New Era of Compliance Duties by Corporate Boards.” (Subscription required)