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Joseph M. McLaughlin and Shannon K. McGovern. Courtesy photos Joseph M. McLaughlin and Shannon K. McGovern. Courtesy photos

Stockholder plaintiffs seeking to assert a non-exculpated breach of fiduciary duty claim against corporate directors arising from adverse company news frequently allege that the directors breached their duty of loyalty by failing to exercise appropriate oversight over company activities. The hallmark of the claim known under Delaware law as a Caremark claim is bad faith; director liability requires proof that the directors knowingly (1) failed to implement any board-level reporting or information system or controls; or (2) having implemented such a system or controls, consciously failed to monitor or oversee its operation. While Delaware courts have repeatedly characterized the claim as possibly the most difficult claim in corporate law to establish, a recent Delaware Supreme Court decision reversing dismissal of a Caremark claim reminds practitioners that courts will scrutinize board members’ close personal relationships with management when analyzing demand futility and that directors’ duty to monitor does have substance. In Marchand v. Barnhill, — A.3d —-, 2019 WL 2509617 (Del. June 18, 2019), the court emphasized Caremark’s “bottom-line requirement” that a board “make a good faith effort—i.e., try—to put in place a reasonable system of board-level monitoring and reporting.” While only a motion to dismiss decision, Marchand provides practical guidance on how boards may discharge their risk oversight duties.

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