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Insights from the Delaware courts on board oversight of compliance programs

Rebecca Walker (rwalker@kaplanwalker.com) is a partner in the law firm of Kaplan & Walker LLP, located in Santa Monica, California, and Princeton, New Jersey, USA.

Since the Delaware Chancery Court’s decision in the Caremark[1] case in 1996, it has been understood that boards of directors owe a fiduciary duty to oversee an organization’s compliance monitoring and reporting systems. Or, to use the court’s language in that case, boards cannot “satisfy their obligation to be reasonably informed concerning the corporation, without assuring themselves that information and reporting systems exist in the organization that are reasonably designed to provide to senior management and to the board itself timely, accurate information sufficient to allow management and the board, each within its scope, to reach informed judgments concerning...the corporation’s compliance with law....”

Since Caremark, it has also been clear that holding directors personally liable for misconduct at an organization (for failure to exercise their duty to be reasonably informed) is quite difficult. Indeed, according to the Delaware courts, it is “possibly the most difficult theory in corporation law upon which a plaintiff might hope to win a judgment.”[2]

This high bar for liability has resulted in a large number of dismissed cases over the intervening years. However, in 2019, in two different cases, Delaware courts refused to dismiss plaintiffs’ Caremark claims on summary judgment, allowing the cases to proceed. Although the courts gave no indication that their decisions were intended to modify existing law, the decisions do further expand on Caremark in a way that is important for compliance and ethics professionals to be aware of. Robust and engaged board oversight of compliance systems is necessary to afford a compliance program the level of independence and authority that is required for effectiveness, and these cases offer a rare (from the Delaware courts, at least) opportunity for organizations to revisit the topic of board oversight of compliance. In this article, we will review both of the recent cases with that in mind. But first, a little background on Delaware law in this area.

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