72 Am. U. L. Rev. 719 (2023).

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Abstract

In 1996, the Delaware Court of Chancery detailed the minimum standard for corporate boards of directors (“board”) with regard to corporate compliance programs and monitoring protocols. The landmark Caremark decision held that directors would not face liability for a breach of fiduciary duties unless they failed to implement a system of controls and compliance, or knowingly failed to monitor that system. In order to bring a successful Caremark claim, plaintiffs must prove that the board operated in bad faith by failing to exercise oversight in a sustained or systemic way. The Delaware Court of Chancery opinion noted that the theory underpinning a Caremark claim is one of the most difficult for plaintiffs to prove. As a result, boards have enjoyed nearly unlimited protection, regardless of events occurring at the company on their watch. However, this longstanding protection has begun to wane in the past four years.

This Article contributes to the analysis of the recent shift in Caremark claims in three ways. First, the Article details the recent evolution of the Caremark standard for corporate compliance required by corporate board members. Second, the Article analyzes how Caremark’s evolution will impact the Directors & Officers (“D&O”) insurance market and what that means for corporate executives. D&O insurance plays a critical role in protecting directors and officers, who have until recently been seemingly beyond the reach of successful shareholder litigation. While the success of bringing a Caremark claim is still very much an uphill battle, the risk calculus has shifted, and this shift is seen in D&O insurance. Finally, the Article discusses the impact of the Caremark standard within current regulatory trends that corporate executives need to continue to monitor. Given the likelihood of increasing regulations in new areas, including environmental, social, and corporate governance (ESG) and cybersecurity, the pressure for corporate compliance and board action will continue to increase. The result: an increase in the number of Caremark claims, further oversight expectations on directors and officers, and additional pressure on D&O insurance coverage.

* Visiting Assistant Professor, Gonzaga University School of Law.

** Associate Professor, Washington & Lee University School of Law.