Health care provider boards of directors have been put on notice—given these two recent Delaware court decisions - Clovis and Marchand—that courts may be willing to significantly extend a corporate board’s Caremark duty to monitor.
When read together, the Clovis and Marchand decisions suggest that corporate directors could face an increased risk of shareholders’ lawsuits and/or personal liability whenever the corporation suffers damage from a violation of law or other material risk area.
In light of the changes invoked by the above referenced decisions, the following are a number of key takeaways for health care provider directors and officers.
The risk of personal liability for corporate directors increases substantially when comprehensive laws and externally imposed regulations govern a corporation’s mission critical operations. In Clovis, the Delaware Chancery Court permitted a lawsuit to proceed against the directors of a biopharmaceutical start-up alleging that the directors consciously and repeatedly failed to monitor the company’s compliance with regulatory mandates in connection with the “mission critical” clinical trial of the company’s developmental cancer drug. In Marchand, the Delaware Supreme Court permitted a lawsuit to proceed against the board of Blue Bell Creameries, a privately held ice cream maker, for breach of duty of loyalty and bad faith for failure to provide adequate oversight of food safety and associated regulatory compliance risks. The analogy to health systems and other providers, such as home health and hospice organizations, long-term care and behavioral health facilities, appears apt given their missions of providing good quality clinical care while protecting the health and safety of their patients, as well as the fiscal safety of the organizations, in a highly regulated environment.
Note: while many health care organizations may have not-for-profit status and, thus, lack “shareholders,” personal liability for directors may still apply and attach. For example, bondholders whose investments are damaged could assert these Marchand and Clovis theories for purposes of recovery. Moreover, and while not certain, state Attorneys General, asserting charitable doctrine authority, may try to adopt the posture of a “shareholder” under the positions espoused in the above-referenced cases.
In highly regulated industries, such as health care, counsel and boards of directors are encouraged to understand, with particularity, the sorts of risks to which the organization may be subject and examine overall board structure and expertise to monitor and address or correct such risks.