A new Delaware Chancery Court decision provides additional clarity on the burdens associated with substantiating a claim of breach of fiduciary duty for compliance program oversight (the so-called "Caremark" duty). The case also allows general counsel to address with key board committees how this duty may be (differently) evaluated in the context of a governmental enforcement action.

The case--a shareholder derivative action--was based upon allegations that the company's board was aware of several company violations of antitrust laws yet failed to take pro-active steps to improve antitrust compliance. The court reiterated that evidence of "bad faith" (i.e., "conscious disregard") was necessary to establish the elements of a Caremark claim. According to the chancery court's definition, incorrect exercise of business judgment in response to compliance "red flags" is insufficient to constitute bad faith.

It has been often noted by courts that Caremark claims are among the most difficult corporate litigation claims to be instituted against board members. However, it should be noted that there are no leading state or federal decisions that conclusively apply the Caremark "bad faith" standard to nonprofit boards. Further, it is uncertain that the Department of Justice, the Office of Inspector General and other regulatory agencies would feel limited by the Caremark standard in evaluating the effectiveness of corporation's compliance plan (and the board's oversight role thereof) in the context of a governmental investigation. The health system general counsel is well suited to place Caremark-related judicial decisions in the proper context for the governing board.

New Judicial Evaluation Of "Caremark" Standard

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