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Caremark Is Alive And Well – Director Liability In Delaware

The last time I wrote about In Re Caremark International Inc. (“Caremark”), and its protections for a board of directors from breach of fiduciary duty claims, was in early 2021 following a year of cases that had eroded its historical strong defenses.  Now, almost two years later, boards have paid attention to the judicial opinions and added compliance practices, including implementing written oversight systems, resulting in a dramatic uptick in the dismissal of plaintiff’s attempts to satisfy Caremark claims.


In Re Caremark International Inc. Derivative Litigation was a civil action in the Delaware Court of Chancery in 1996 which drilled down on a director’s duty of care in the oversight context.  A Caremark claim “seeks to hold directors accountable for the consequences of a corporate trauma.” To adequately allege such a claim, a plaintiff must allege that the board had some level of involvement in the trauma such that it knew or should have known about the risk and failed to discharge its fiduciary obligations.

Caremark claims have long been regarded by Delaware courts as “possibly the most difficult theory in corporation law upon which a plaintiff might hope to win a judgment.” To plead and prove a Caremark claim, a stockholder plaintiff must show that the board either (i) “utterly failed to implement any reporting information restrictions or controls”; or (ii) having implemented them, “consciously failed to monitor or oversee their operations, thus disabling themselves from being informed of risks or problems requiring their attention.” Caremark requires a good faith effort by the board, not perfection, and that the board will only face liability if the evidence demonstrates that a board has not made a good faith effort to fulfill its duties. Not surprisingly, these claims often fail at the pleading stage.

However, in 2020 and 2021 a string of cases upheld Caremark claims finding utter failure of duties by board members.  Marchand v. Barnhill and In re Clovis Oncology Derivative Litigation upheld claims against a board under Caremark and were then cited by further cases upholding claims, including Hughes v. Hu, Teamsters Local 443 Health Services & Insurance Plan v. Chou and In Re The Boeing Company Derivative Litigation (for more on these cases, see HERE.  Each case drilled down on the importance of an active, engaged board with oversight of material risk and compliance issues.  As part of the governance process, protocols need to be in place so that issues are brought to the board or relevant board committee promptly.  The Delaware Court also found that a basic requirement for a board is to review what key or mission critical risks exist (or potentially exist) for oversight. The board also needs to properly respond to risks or issues in a timely fashion and follow up with management.  Board minutes should include notes on all actions taken.

Following this string of cases, many boards implemented the additional written controls and procedures suggested by the Court and the Court, in turn, has more readily dismissed Caremark claims.  Importantly, one of the key components of board protection has proven to be proper books and records of board procedures and implementation of those procedures.  The more robust the documentation, including systems for addressing risks, efforts to hold (and holding) regular meetings, and procedures for receiving and responding to information, the better the protection.

Recent Cases

City of Detroit Police & Fire Retirement System v. Hamrock

In the July 2022 case of City of Detroit Police & Fire Retirement System v. Hamrock (“Hamrock”), the Chancery Court dismissed Caremark claims.  In Hamrock, an energy company (NiSource) caused a massive explosion with resultant death, injury and property damage, following an incorrectly replaced gas pipe.  The City of Detroit Police & Fire Retirement System (“Detroit”) as a stockholder, filed a derivative suit to hold the NiSource board of directors liable asserting Caremark claims.

Detroit’s three main theories were proven wrong.  First, Detroit alleged that NiSource failed to implement a reporting or monitoring system to oversee pipeline safety.  However, evidence showed that not only did it have a system, but the responsible committee actively monitored and reviewed pipeline safety compliance.  Second, Detroit argued that NiSource was “in the business” of unlawful conduct.  However, again evidence dispelled this theory showing that board committees took concrete steps to align NiSource’s operations with regulations and industry standards.  Finally, Detroit argued that the NiSource board ignored “red flags” regarding NiSource’s repeated violations of pipeline safety laws.  Again, the Court found the board had performed its duties enough to avoid Caremark liability.

In siding with the NiSource board, the Chancery Court made several observations: (i) the board had several committees tasked with monitoring and assessing risks, including an Environmental, Safety and Sustainability (“ES&S”) Committee which had oversight over the pipeline safety; (ii) the ES&S Committee was active, meeting regularly and providing reports to the board as a whole; (iii) the board made a good faith effort to put into place a reasonable system of monitoring and reporting; (iv) the Board was directing a “state-by-state” initiative to replace the company’s aging pipeline system and outdated record-keeping system; (v) the Board voluntarily took several concrete steps to implement higher safety standards at multiple subsidiaries before the explosions; and (vi) the board did not have knowledge of specific red flags to forewarn them of the potential for an explosion of the type in this case.

Solarwinds Corporation v. Bingle

In September 2022, the Court once again dismissed attempted Caremark claims in Solarwinds Corporation v. Bingle, et al (“Solarwinds”).  Solarwinds Corp was a software management firm that was victim to Russian hackers damaging its customers and the company itself.  Plaintiffs asserted that the board failed to adequately oversee the risk to cybersecurity of criminal attack.  The Court, in this case, reprimanded the recent deluge of attempted Caremark claims and reiterated the robust standards necessary to attack a Delaware board of directors.

The court emphasized that a board’s failure to prevent a corporate trauma is not sufficient for liability under Caremark unless the failure was due to “bad faith” by a majority of the directors.  Despite evidence that the board (i) did not receive relevant information from the committees with responsibility for cybersecurity; (ii) did not discuss cybersecurity even once in the two years leading up to the attack; and (iii) ignored warnings about cybersecurity deficiencies, the Court found that the plaintiff’s failed to adequately plead “bad faith.”

To the contrary, the Court found that the board (i) did not allow the company itself to violate law; (ii) did ensure that the company had at least a minimal reporting system about corporate risk, including cybersecurity; and (iii) did not ignore sufficient red flags of cyber threats to imply a conscious disregard of a known duty.

The Author

Laura Anthony, Esq.
Founding Partner
Anthony L.G., PLLC
A Corporate Law Firm

Securities attorney Laura Anthony and her experienced legal team provide ongoing corporate counsel to small and mid-size private companies, OTC and exchange traded public companies as well as private companies going public on the Nasdaq, NYSE American or over-the-counter market, such as the OTCQB and OTCQX. For more than two decades Anthony L.G., PLLC has served clients providing fast, personalized, cutting-edge legal service. The firm’s reputation and relationships provide invaluable resources to clients including introductions to investment bankers, broker-dealers, institutional investors and other strategic alliances. The firm’s focus includes, but is not limited to, compliance with the Securities Act of 1933 offer sale and registration requirements, including private placement transactions under Regulation D and Regulation S and PIPE Transactions, securities token offerings and initial coin offerings, Regulation A/A+ offerings, as well as registration statements on Forms S-1, S-3, S-8 and merger registrations on Form S-4; compliance with the Securities Exchange Act of 1934, including registration on Form 10, reporting on Forms 10-Q, 10-K and 8-K, and 14C Information and 14A Proxy Statements; all forms of going public transactions; mergers and acquisitions including both reverse mergers and forward mergers; applications to and compliance with the corporate governance requirements of securities exchanges including Nasdaq and NYSE American; general corporate; and general contract and business transactions. Ms. Anthony and her firm represent both target and acquiring companies in merger and acquisition transactions, including the preparation of transaction documents such as merger agreements, share exchange agreements, stock purchase agreements, asset purchase agreements and reorganization agreements. The ALG legal team assists Pubcos in complying with the requirements of federal and state securities laws and SROs such as FINRA for 15c2-11 applications, corporate name changes, reverse and forward splits and changes of domicile. Ms. Anthony is also the author of SecuritiesLawBlog.com, the small-cap and middle market’s top source for industry news, and the producer and host of LawCast.com, Corporate Finance in Focus. In addition to many other major metropolitan areas, the firm currently represents clients in New York, Los Angeles, Miami, Boca Raton, West Palm Beach, Atlanta, Phoenix, Scottsdale, Charlotte, Cincinnati, Cleveland, Washington, D.C., Denver, Tampa, Detroit and Dallas.

Ms. Anthony is a member of various professional organizations including the Crowdfunding Professional Association (CfPA), Palm Beach County Bar Association, the Florida Bar Association, the American Bar Association and the ABA committees on Federal Securities Regulations and Private Equity and Venture Capital. She is a supporter of several community charities including siting on the board of directors of the American Red Cross for Palm Beach and Martin Counties, and providing financial support to the Susan Komen Foundation, Opportunity, Inc., New Hope Charities, the Society of the Four Arts, the Norton Museum of Art, Palm Beach County Zoo Society, the Kravis Center for the Performing Arts and several others. She is also a financial and hands-on supporter of Palm Beach Day Academy, one of Palm Beach’s oldest and most respected educational institutions. She currently resides in Palm Beach with her husband and daughter.

Ms. Anthony is an honors graduate from Florida State University College of Law and has been practicing law since 1993.

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