III. Jurisprudence Addressing Director Oversight and Exculpation Outside of Delaware
This Part identifies trends from the forty-seven non-Delaware Caremark decisions that were handed down in seventeen different jurisdictions. The high-level takeaway is that adoption of Marchand outside of Delaware is unlikely, but also possibly not necessary. The first two subparts expand on the causes that hinder Caremark’s development in non-Delaware jurisdictions: they either lack the ancillary litigation rules that enable plaintiffs to craft complaints that can successfully overcome Caremark’s historically difficult pleading requirement or have exculpated all aspects of an unintentional oversight failure, making litigation a lost cause. The third subpart depicts non-Delaware jurisdictions’ application of “Delaware vocabulary” without regard to their own statutory language. Finally, the fourth subpart expands on the instances where courts were willing to infer the requisite “bad faith” state of mind. As the sections below will show, one influential decision was handed down more than a decade before Marchand, while the small number of more recent successful oversight cases reached their result without relying on Marchand.
A. Importance of Ancillary Litigation Rules
The Caremark doctrine embodies the core fiduciary obligation to oversee the corporation. A fiduciary breach can potentially lead to personal liability. Even when a jurisdiction’s exculpation shield does not prohibit liability for purely defective oversight, substantial obstacles stand in the way of a discussion on the merits of the complaint. Caremark claims implicate harm to the corporation. As the aggrieved party, the cause of action against directors for suspect monitoring belongs to the corporation. In order to pursue the claim, a shareholder must apply and receive permission from the court to pursue the claim derivatively on the corporation’s behalf.
Derivative shareholder litigation is an uphill battle. Producing a factual record sufficient to state a claim that will withstand initial judicial scrutiny takes time and resources. The Delaware judiciary encouraged prospective plaintiffs to overcome their informational shortcomings by filing preliminary “books and records” requests. Delaware’s relaxation of its approach toward pre-trial books and records requests led to more robust complaints that had a greater likelihood of overcoming defendants’ inevitable motion to dismiss. Caremark’s expansion is attributable to Delaware’s facilitation of a stronger factual record. While it is certainly possible that other jurisdictions will follow Delaware’s lead, this article’s database shows that the majority of non-Delaware Caremark complaints were dismissed for plaintiffs’ inability to plead the particularized facts necessary to withstand the preliminary judicial scrutiny.
Nor is it likely that other jurisdictions will follow suit and make it easier for plaintiffs to pass this threshold in the future. New Jersey, the only jurisdiction that referenced Delaware’s evolving approach to shareholders’ information rights, serves as a cautionary tale about the complexities of cross-jurisdictional comparisons, even when the underlying statutory framework is identical.
In In re Johnson & Johnson, multiple fines and regulatory warnings against Johnson & Johnson ( J&J) for offenses as diverse as off-label marketing, recalls of defective health products, and sales-boosting kickbacks generated a slew of derivative lawsuits aimed at holding members of the board personally liable for the harm suffered by J&J. The district court expanded on the relationship between Caremark, the New Jersey director exculpation statute, and the requisite mental state necessary to overcome the presumption that the board of directors should be afforded the opportunity to consider the shareholder demand. While J&J was indeed the subject of multiple FDA investigations and eventual settlements, the court concluded that the numerous allegations in the complaint did not substantiate the claim that the directors knowingly disregarded a duty to act.
Plaintiffs’ failure to satisfy the difficult pleading requirements prompted the district court to consider the nature of the dismissal and contemplate methods that would enable plaintiffs to obtain the information necessary to produce a fact-intensive complaint. Citing developments in Delaware, the J&J court suggested that plaintiffs take a similar route and submit a books-and-records request to satisfy the heightened pleading requirement.
One might expect that the J&J decision would spur New Jersey oversight law to evolve in a similar manner to the Delaware model. This was not to be. Instead, two developments acted in concert to stifle litigation and limit the further growth of New Jersey’s version of the Caremark doctrine.
The first development was initiated by the legislature. Not long after J&J was handed down, the New Jersey corporate code was amended to allow corporations to set an unavoidable demand requirement for all derivative claims in their articles of incorporation. An inability to circumvent demand severely curtails would-be plaintiffs’ desire to initiate litigation: even assuming plaintiffs would be willing to expend the time and resources to assemble the facts necessary to satisfy the heightened pleading requirement, courts’ presumption of propriety when assessing the board’s response to the demand would be difficult to overcome. In light of these odds, rational plaintiffs—on the advice of their equally rational attorneys—would divert their attention to easier targets. A rare attempt to initiate derivative litigation against J&J without demand was summarily dismissed, and the substantive issue of board liability for the corporation’s continued production of allegedly cancerous talc-based body powder was never considered by the court.
The second development further illustrates the complex relationship between procedural rules and the substantive law of director oversight. Absent an alternative procedural pathway that would grant shareholders access to important corporate documents, the high pleading standard and demand for particularized facts would spell the end to their ability to sustain a derivative lawsuit. Despite the J&J court’s suggestion that New Jersey follow Delaware and relax its approach toward books and records requests, later decisions opted for a different approach. The court in Feuer v. Merck & Co., Inc. took a very narrow view to the relevant books and records that shareholders have a statutory right to inspect. In a contemporaneous ruling, a different New Jersey court refused to lessen the factual pleading threshold that a shareholder must satisfy in order to present a “credible basis” that will entitle her to inspect a corporation’s books and records. Together with the statutory-enabled requirement of universal demand, these developments sound the death knell on Caremark derivative litigation in New Jersey and, with it, any further development of New Jersey oversight caselaw. As New Jersey is the only jurisdiction whose judiciary even acknowledged Delaware’s evolving attitude toward shareholder information rights, it is safe to assume expansion of shareholder information rights to facilitate bringing Caremark claims in other jurisdictions will not be forthcoming.
Courts applying Minnesota law produced four judicial opinions analyzing director oversight claims in the timeline that corresponds to the Caremark era that reclassified defective oversight as a facet of the non-exculpable duty of loyalty. The lone settlement approval in this subset involved a corporation whose option-granting practice was highlighted in the Wall Street Journal article that kicked off the backdating scandal. The remaining cases were all dismissed due to plaintiffs’ failure to satisfy the stringent pleading standard necessary to overcome the demand hurdle.
Minnesota oversight caselaw exemplifies an additional impediment to the evolution of the Caremark doctrine in jurisdictions that adopt a Delaware-style “bad faith” exception to the director exculpation—judicial deference to the recommendations of a special litigation committees. Delaware courts will scrutinize every aspect of the special litigation committee before applying its independent judgment to the committee’s substantive decision whether to pursue the litigation. Minnesota courts, by contrast, are instructed to apply business judgment rule review to the committee’s recommendations. In situations where a special litigation committee is used, this distinction short-circuits any judicial examination of the underlying conduct and disincentivizes future oversight complaints.
This subpart discussed trends in oversight litigation outside of Delaware. Even when the statutory framework is identical, dissimilar ancillary litigation rules cause the underlying doctrine to evolve differently. Delaware’s ancillary rules facilitate the filing of robust complaints that have the potential to overcome defendants’ inevitable motion to dismiss. Assuming that plaintiffs are able traverse this path, Delaware imposes a higher burden on board-created special litigation committees that attempt to wrest back control of the litigation. These developments are missing in other jurisdictions. Rational shareholders in these jurisdictions understand the odds facing them and their willingness to vindicate a corporation’s cause of action understandably decreases. Absent the catalyzing event of a shareholder complaint, the law of director oversight in these jurisdictions will remain stagnant.
B. Caremark-Proof Jurisdictions
The jurisdictions listed in Parts II.B and II.C share a point of similarity regarding the scope of their exculpation provision. In contrast to the DGCL’s “good faith” exception, the exculpation provisions in these jurisdictions only exclude “intentional” acts from their coverage.
The deliberate choice of terminology has practical import. Take, for example, a quintessential Caremark scenario: corporate harm that arose from nefarious acts perpetrated by corporate underlings unbeknownst to the directors. An MBCA-style exculpation provision appears to shield directors from all liability that arguably could have been prevented by more effective oversight. Negligent oversight connotes a lack of awareness to a material underlying fact. Since the directors of the corporation would be unaware of the nefarious acts, they could not possibly have intended for them to occur. Shareholder claims against an exculpated fiduciary breach are dead on arrival, and rational shareholders would think twice before exerting their money and efforts for naught. As a result, unsuccessful oversight is effectively litigation-proof in jurisdictions that have adopted the “intent” exception to director exculpation. The paucity of oversight cases in these twenty-three jurisdictions supports this claim.
The analysis above shows that director oversight duties are non-enforceable in MBCA jurisdictions. As shareholder litigation remains an important accountability mechanism, the MBCA adopted two measures aimed at promoting more vigorous observance of a director’s fiduciary duties. First, a 2013 amendment to the MBCA situated a sustained monitoring failure among the enumerated types of conduct that could potentially lead to director liability. This statutory elaboration attempts to incentivize more active board oversight; after all, if a particular type of conduct is singled out as a source of personal liability, reasonable directors should take heed and ensure they do not run afoul of the proscribed behavior. A closer look, however, reveals the limited utility of this approach. The statutory language makes clear that the underlying claim does not by itself circumvent the protections of a director’s exculpation shield. In other words, an allegation of defective oversight still needs to clear the exculpation barrier. So long as the scope of the MBCA-endorsed exculpation provision requires plaintiffs to prove that the directors’ actions were intended to harm the corporation or undertake in criminal activity, the complaint will be dismissed, and the substantive allegation regarding the defective monitoring will not receive its day in court.
Second, in a move that appears at odds with the plain language of the exculpation provision itself, the official comment to MBCA section 2.02 was amended in 2016 to clarify that the “intentional” frame of mind references “the specific intent to perform, or failure to perform, the acts with actual knowledge that the director’s action, or failure to act, will cause harm, rather than a general intent to perform the acts which cause the harm.” According to the clarification, a director’s non-exculpable intent applies to the performance of her fiduciary duties, rather than the underlying illicit activity. In the oversight context, the exculpation shield would therefore not extend to situations where a director has deliberately decided to ignore her monitoring obligation. This interpretation equates the scope of the MBCA exculpation provision with the state of Delaware oversight liability during the post-Stone but pre-Marchand era. Nevertheless. this article’s database does not include a single Caremark decision regarding a corporation incorporated in a jurisdiction that has adopted the MBCA approach to director exculpation, suggesting that directors in those jurisdictions face little Caremark litigation risk.
The analysis of the six non-MBCA jurisdictions differs slightly. In contrast to the complete lack of caselaw in “pure” MBCA jurisdictions, a few Caremark claims were filed against corporations whose exculpation shield requires plaintiffs to prove at least “intent” in order to hold directors liable. Outside of the lone Washington case which will be described in the next section, none of the other nine oversight claims survived a motion to dismiss.
An overview of Nevada oversight caselaw is instructive. Nevada has made significant efforts to lure out-of-state corporations to reincorporate in the Silver State. The substantive protections afforded to corporate insiders figure prominently in the state’s marketing efforts. Directors of Nevada corporations are shielded from all liability unless their fiduciary breach “involved intentional misconduct, fraud or a knowing violation of the law.” This pro-director approach has succeeded in attracting outside corporations with a tendency of being on the receiving end of shareholder lawsuits to reincorporate in Nevada. Adjudication of shareholder claims against Nevada corporations produces an interesting dynamic. On one hand, the exculpation statute creates a high threshold to liability. On the other hand, the corporations that are swayed to reincorporate because of the strong director protections are litigation-prone for a reason. Nevada courts’ evolving appreciation of the state’s exculpation statute and its relationship with oversight liability is explained below.
A multi-billion-dollar service contract with the United Kingdom’s National Health Service (NHS) was at the heart of the dispute in Morefield v. Bailey. A formal investigation by the SEC prompted the corporation to reduce its projected revenue from the project by approximately $2 billion. This restatement predictably spawned lawsuits alleging federal securities law violations. Less than a month after a federal judge refused to dismiss a securities class action for the same underlying facts, plaintiff made a demand on the board to take legal action against those responsible for the defective oversight. This proved to be a strategic blunder, as demand on the board is interpreted as plaintiffs’ acquiescence to continued board control over the underlying cause of action. Plaintiff ’s conclusory allegations were unable to overcome the business judgment rule’s presumption of proprietary afforded to the board’s decision to deny the demand.
Of note to the cross-jurisdictional comparison of oversight claims is the district court’s complementary assessments of the breach-of-fiduciary-duty claim. The court was aware that a previous ruling in the related securities law claim found that one of the directors was “at least reckless” with regard to his oversight of the problematic disclosures. The plaintiffs, however, were unable to provide more than conclusory allegations to substantiate this aspect of their complaint. The court emphasized that even a finding of recklessness is insufficient to overcome the high threshold set by the Nevada exculpation statute.
The analysis of a fiduciary duty claim under Nevada law was proceeded by an evaluation of “Caremark doctrine liability.” The court analyzed Delaware caselaw before concluding that plaintiffs were similarly unable to meet the heavy burden of Stone v. Ritter. The Caremark analysis appeared to be unrelated to the state fiduciary duty claim, implying that it serves as an independent and distinct source of liability. This bifurcated approach overlooks the fact that the mental state that triggers Caremark liability is exculpated under Nevada law. Unfortunately, the Morefield court did not address the tension between the two seemingly independent prongs of its inquiry.
The doctrinal inconsistency was resolved in later decisions. In re ZAGG arose from a CEO’s failure to disclose the fact that he had pledged stock in the corporation as security for a margin account. Only after several calls were made on the CEO’s account did the corporation disclose the existence of the pledge. Plaintiffs attempted to hold the directors personally liable for violations of section 14(a) of the Securities Exchange Act and breach of fiduciary duty. For demand to be excused, plaintiffs are required to prove more than half the members of the board face a substantial likelihood of personal liability. As exculpated claims cannot lead to personal liability, the Tenth Circuit investigated the scope of the Nevada exculpation provision. The investigation affirmed the broad scope of Nevada’s exculpation provision, which practically rules out potential liability for Caremark-style defective oversight.
The Nevada Supreme Court subsequently adopted the In re Zagg court’s interpretation of the Nevada exculpation provision. The message was heard loud and clear, and the few subsequent challenges alleging defective board oversight were dismissed for their failure to provide the factual support that would situate the directors’ actions beyond the scope of the Nevada exculpation shield. In neither of the recent Nevada oversight cases did the courts cite to Marchand or any other Delaware oversight case of more recent vintage.
This subpart depicted the state of potential director oversight liability for corporations incorporated in any of the twenty-three jurisdictions whose exculpation provision precludes liability for non-intentional acts. The paucity of oversight claims affirms the discouraging effect of these jurisdictions’ broad exculpation shield. As doctrinal development requires a triggering complaint, judicial expansion of the oversight doctrine is unlikely to occur in these jurisdictions, and defective director oversight remains effectively litigation-proof.
C. The Unintended Consequences of Lingua Franca
An additional trend has emerged from the collected non-Delaware oversight cases. Jurisdictions with relatively underdeveloped corporate case law look outside their borders for doctrinal guidance on issues that are not frequently litigated in their home system. The judiciary’s reputation for sophisticated doctrinal analysis and the state’s abundance of judicial decisions have made Delaware law the go-to point of comparison. Frequent referrals and doctrinal adoptions helped transform Delaware-specific doctrines into an immutable component of the U.S. corporate law vocabulary. That the non-Delaware oversight cases in the database include numerous references to Caremark and Stone is unsurprising. What is surprising is that most references and adoptions did so with at best a passing observation about the relationship between the Delaware exculpation statute and its oversight doctrine. There are instances where a jurisdiction’s acceptance of the Delaware oversight doctrine appears to be at odds with the scope of the jurisdiction’s own exculpation provision. This phenomenon cuts both ways. It can set a higher bar for oversight liability than what the state legislature apparently intended, and it can also cause the judiciary to be receptive to the possibility of oversight liability when the statute appears to exculpate it out of existence.
California oversight law exemplifies Delaware’s influence on jurisdictions whose exculpation statute appears to be more limited in scope than the Delaware version. While California corporations are allowed to exculpate directors, the exculpation provision lists eight types of actions and omissions that are non-exculpable. In addition to the typical exculpation exclusions for self-dealing or approval of unlawful distributions, the California statute specifies two types of non-exculpable behaviors that could implicate a director’s oversight role: (1) reckless disregard in circumstances in which the director should have been aware of a risk of serious injury to the corporation; and (2) omissions that constitute an unexcused pattern of inattention that amounts to an abdication of duty. In addition, a separate section of the exculpation provision excludes exculpation for omissions that involve the absence of good faith on the part of the director. The wording of the statutory text implies that the California version of “good faith” relates to a director’s subjective intent to advance the best interests of the corporation. On its face, the California exculpation provision does not protect directors from claims of defective monitoring that amount to an “abdication of duty,” without the need for a plaintiff to prove a unique mental state. The cases below depict how the prominence of Delaware’s oversight caselaw leads courts in other jurisdictions to apply what appears to be an incorrect exculpation exception.
In Fischman v. Reed, an underground gas leak at a Sempra Energy, Inc. storage well resulted in the evacuation of over 2,500 people, numerous government investigations, civilian lawsuits, and a misdemeanor criminal complaint filed by the Los Angeles District Attorney’s office. Sempra Energy estimated the direct costs required to address the leak and minimize its impact at up to $300 million, with the corporation’s potential liability a multitude greater than that.
As in all derivative claims, plaintiffs can sidestep demand by proving that the board should relinquish control over the underlying cause of action on account of a substantial likelihood of liability. Relying heavily on both Caremark and Stone, the California district court characterized plaintiff ’s oversight claim as a Prong 2 Caremark claim. Outside of a citation in the corporation’s public disclosures regarding the existence and oversight authority of the board and board committees, the plaintiff was unable to provide any particularized fact that would sustain that claim.
The court’s examination of plaintiff ’s alternative “conscious inaction” theory of liability warrants further discussion. Rosenbloom v. Pyott, a previous Ninth Circuit decision, differentiated pure oversight claims from allegations of conscious director inactivity in the face of wrongdoing at their corporation. In contrast to Rosenbloom, the plaintiffs in Fischman did not provide evidence of numerous warnings and repeated admonitions from the relevant regulatory agencies, and the absence of particularized facts led to a dismissal of this allegation as well. As the derivative litigation in Rosenbloom concerned a Delaware-incorporated corporation, the court correctly applied the “bad faith” threshold for plaintiffs to clear in order to move forward with their claim. Sempra Energy, however, is incorporated in California, but the court did not address the seemingly narrower scope of the California exculpation provision.
The relationship between the California exculpation exceptions and potential oversight liability was unfortunately not clarified in the next opportunity presented to the California district court, Foss v. Barbarosh. The litigation at the heart of Foss stemmed from rosy public reassurances that alluded to continued growth. Numerous lawsuits were filed when the corporation’s earnings failed to live up to the hype. The absence of particularized facts led to the dismissal of the plaintiff ’s oversight claim. In contrast to Fischman, the Foss court referenced the California exculpation statute. The substantive analysis, however, exclusively referenced caselaw that concerned Delaware-incorporated corporations. The exact reach of the other sections of the California exculpation provision was left unexplored. While an investigation of those provisions might not have changed the result, the reliance on Delaware’s statutory language at the expense of the different liability threshold chosen by the legislature hinders the development of a California-specific oversight doctrine and the possibility that it might adopt a pleading threshold that is more attuned to its statutory mandate.
The California caselaw discussed above shows how application of Delaware oversight caselaw can cause non-Delaware courts to interpret a narrower exculpation standard adopted by that state’s legislature consistently with Delaware’s broader exculpation shield. However, there are exceptions. For example, the lone Washington case in the oversight database depicts a different occurrence. The existence of a Washington Caremark claim is noteworthy, as Washington is one of the twenty-two jurisdictions whose exculpation shield precludes director liability for all non-intentional mental states. Yet, in Barovic v. Ballmer, this fact did not prevent plaintiffs in their bid to hold the directors of Microsoft, Inc. personally liable for damages that arose from allegedly anticompetitive practices employed by the industry behemoth. An EU investigation led to a settlement that included the dropping of all charges in exchange for Microsoft’s promise not to unduly restrict Windows adopters in their choice of browser. Unfortunately, Microsoft did not follow through with its promise. After repeated warnings went unheeded, the EU levied upon it an unprecedented $732 million fine. A shareholder demand for the board to investigate the matter and pursue litigation against the culprits responsible for the corporate loss prompted the creation of a demand review committee. The Microsoft board adopted the committee’s recommendation not to pursue the litigation.
Microsoft’s actions failed to dissuade the filing of a request to pursue derivative litigation in order to overturn the board’s decision. While the Washington district court relied primarily on the Delaware caselaw that granted business judgment rule deference to a board’s decision to reject a shareholder demand, it recognized the strand of precedent that would allow the pro-board presumption to be overturned if presented with particular facts that cast doubt on the board’s diligence and good faith. The Barovic court criticized the demand review committee’s refusal to seek input from outside parties, such as EU officials, who might be privy to information that could corroborate plaintiffs’ allegations.
The court similarly relied on Delaware caselaw in its assessment of the underlying oversight claim. Two noteworthy takeaways stand out from the court’s analysis. First, and in contrast to contemporaneous Delaware caselaw that required nothing less than a “smoking gun” as evidence of the board’s collective mental state, the Barovic court was willing to piece together disparate facts in support of an inference of the board’s culpability. That the court’s apparent imposition of a heightened oversight obligation over salient issues predates Marchand by several years underscores its innovation. Second, and arguably even more baffling, is the fact that the court’s analysis of the oversight claim failed to reference the Washington exculpation statute, which exculpates all claims except for “acts or omissions that involve intentional misconduct by a director or a knowing violation of law by a director.” While the court found that the pleadings supported an inference of a “sustained or systemic failure to exercise oversight” by the board, it failed to clarify whether this condition was caused by intentional misconduct, as required by the Washington exculpation stature. The subsequent settlement left the relationship between the lone Washington oversight decision and the Washington exculpation statute shrouded in mystery.
This section explored Delaware’s cross-border influence and its impact on the development of state-specific oversight doctrines. Non-Delaware courts often turn to Delaware caselaw for guidance, despite the potential mismatch with local statutes. The California cases illustrate how courts overlook narrower exculpation provisions in favor of Delaware’s broader scope. Washington represents the counterexample in which the Delaware exculpation shield is narrower than the one in the state of incorporation. In all, this section highlights courts’ disregard for the statutory nuance that drives the Caremark doctrine.
D. Marchand’s Irrelevance?
Marchand represents the current pinnacle of Caremark’s doctrinal evolution in Delaware. Marchand would not have been possible without Stone’s recasting of a director’s oversight obligation as part of her non-exculpable duty of loyalty. In turn, Stone would not have been possible without Caremark’s pronouncement of an affirmative duty to oversee the corporation. Due to Delaware’s dominance in corporate legal thought, one would assume that other jurisdictions will follow a similar trajectory to reach the same doctrinal endpoint currently occupied by Marchand, or at the very least acknowledge the post-Marchand shift in oversight jurisprudence. This subpart shows how caselaw from other jurisdictions fails to support both assumptions.
Two decisions addressing Caremark claims against Abbott Laboratories, Inc. (Abbott) drive the first part of the discussion. Abbott, an Illinois corporation, is a diversified healthcare company that develops and markets pharmaceutical, diagnostic, and hospital products. One of its divisions manufactures diagnostic kits and devices. As might be expected, this area of operation is heavily regulated by the FDA, and the manufacturing process is governed by specific safety guidelines. During a six-year period from 1993 to 1999, the FDA conducted thirteen separate inspections of Abbott facilities. The inspections revealed multiple regulatory compliance failures, which eventually yielded four formal warnings. On the same date that the FDA filed for an injunction, the parties signed a consent decree which prohibited Abbott from continuing to manufacture select in vitro diagnostic devices without prior FDA clearance. The decree further required Abbott to destroy inventories of in vitro diagnostic kits and withdraw them from the U.S. market. The destruction and suspension of sales for these units resulted in a loss of approximately $250 million in annual revenue. In addition, Abbott agreed to pay a $100 million fine, which at that time was the largest penalty ever imposed for a civil violation of FDA regulations. Multiple shareholder derivative lawsuits aimed at holding Abbott’s directors liable for these losses quickly followed.
The Seventh Circuit’s analysis in Abbot I shined a light on the issue of director liability when the corporation has a “Delaware-style” exculpation provision in its articles of incorporation. The analysis produced four interesting takeaways. First, despite an extensive discussion of Caremark, the Seventh Circuit eventually concluded that the case was not a Caremark case. That conclusion, while odd today, makes sense against the backdrop of the caselaw at the time. Caremark broadly discussed the board’s failure to institute a monitoring system. The distinction between a complete failure to institute one in the first place (Prong 1) and a subsequent lack of oversight (Prong 2) is attributable to Stone, which the Delaware Supreme Court handed down three years after the Seventh Circuit’s Abbott I decision. Second, the court was cognizant of the scope and effect of the director exculpation provision in Abbott’s articles of incorporation. As the decision was handed down before Stone clarified that the duty of good faith was a subset of the duty of loyalty, the Abbott court relied on the then-current Delaware caselaw that alluded to three distinct fiduciary duties. Without getting into the doctrinal bog that the Delaware Supreme Court would later clear up in Stone, the court concluded that, at least at the motion to dismiss stage, the directors’ actions and omissions were not in good faith and therefore not protected by the exculpation provision. Third, Abbott I is noteworthy for the court’s willingness to accept inferences against the board of directors. This willingness stands in stark contrast to the corresponding Caremark era in Delaware. Delaware’s relaxation of the pleading requirement by way of plaintiff-friendly inferences occurred a decade and a half after the Abbott I decision.
A later claim against Abbott seeking to hold its directors liable for a completely different omission further demonstrates courts’ ability to accept inferences regarding director knowledge even in the pre-Marchand landscape. In this occasion, the derivative litigation at issue in Abbott II stemmed from $1.5 billion dollar settlement that Abbot entered to resolve governmental investigations into the sales and marketing practices of “off-label” prescription drugs. As Abbott II was handed down a decade after Abbott I, the Illinois district court acknowledged both Disney and Stone and cited them in its analysis. While no direct “smoking gun” regarding the board’s knowledge of red flags was provided, the court applied the Seventh Circuit’s reasoning in Abbott I to accept inferences regarding the board’s collective mental state. Abbott thereafter gained the dubious distinction of being on the receiving end of two different shareholder oversight claims that survived a motion to dismiss for failure to make demand on the board. That this occurred well before Marchand’s relaxation of the pleading threshold illustrates how jurisdictions can achieve the same practical result without the need to copy Delaware’s doctrinal evolution.
This section’s analysis of Marchand’s impact outside of Delaware concludes with a depiction of Kansas oversight law. The Kansas Supreme Court has on multiple occasions instructed lower courts to follow Delaware case law when adjudicating corporate law issues. However, despite the court’s instruction, the limited post-Marchand caselaw in Kansas does not adopt a similar approach. Dorfman v. Griffin arose from a shareholder complaint contending that the members of the board of directors should be held personally liable for failing to oversee the corporation’s allegedly problematic accounting practice. This decision was handed down in 2021, several years after Marchand transformed Delaware’s judicial attitude toward inferences regarding the directors’ mental state. Curiously, the Kansas district court’s otherwise methodical discussion of the Delaware law of shareholder demand and potential oversight liability completely overlooked this development, and the complaint was subsequently dismissed for failure to provide particularized facts necessary to satisfy the pleading requirement.
The answer to this puzzling occurrence is perhaps found in a concurrent claim against Sprint Nextel Corporation (Sprint) seeking to hold the board of directors liable for allegedly defective oversight over the corporation’s tax practices. A few years following the dismissal of an earlier complaint, the corporation settled another set of tax evasion allegations with the New York Attorney General for $330 million. In In re Sprint Nextel, a slew of derivative plaintiffs attempted to hold the directors personally liable for the corporation’s loss. As plaintiffs’ pleadings rehashed the allegations that were ruled upon in the previously dismissed complaint, the Kansas district court dismissed the complaint on the basis of res judicata. Plaintiffs’ contention that a change in the underlying law of director oversight justified the commencement of the proceeding was unpersuasive. Rather, the court opined that Marchand did not substantially alter the board’s legal obligation to monitor. While perhaps technically accurate, the court’s statement misses the shift in Delaware’s judicial attitude toward oversight claims.
In sum, despite Marchand’s impact on the present and future of Delaware oversight law, other jurisdictions have the power to carve their own path to achieve the same substantive result. Conversely, the fact that a jurisdiction looks to Delaware for guidance does not ensure that it will appreciate and adopt Marchand’s acceptance of inferences in mission critical aspects of the business.
Conclusion
Delaware is the universal language of corporate legal theory and doctrine, and Delaware’s Caremark duties are the universally accepted shorthand for the board of directors’ proactive monitoring obligation. The Caremark doctrine’s most recent update in Marchand signals greater expectations of the board. This Article examines whether other jurisdictions are likely to follow Delaware’s lead. The Article’s multi-jurisdictional comparison finds that most jurisdictions have either completely exculpated directors’ oversight obligation or lack the ancillary litigation rules that facilitate the drafting of an effective complaint. Without the triggering event of a derivative lawsuit, a jurisdiction’s case law will not evolve. While Delaware sets the tone, the nuance of jurisdiction-specific statutes and judicial discretion shape the evolution of non-Delaware oversight claims. As a result, the underlying policy debates that are adjudicated under Caremark’s current iteration in Delaware will not take root outside that jurisdiction.
