January 31, 2017 Articles

Yellow Flags Are Not Red Flags: Delaware Court of Chancery Rejects Caremark Claim in Reiter v. Fairbank

A board’s good-faith attention to a company’s most pressing compliance risks should help the directors avoid personal liability.

By Joseph W. Swanson

In October 2016, the Delaware Court of Chancery rejected a shareholder derivative lawsuit premised on an alleged lack of oversight by the directors of Capital One Financial Corp., Reiter v. Fairbank, C.A. No. 11693-CB, 2016 WL 6081823 (Del. Ch. Oct. 18, 2016). In so doing, the court not only provided a helpful summary of the law governing fiduciary duty claims grounded on a lack of oversight but also made clear the obstacles plaintiffs must overcome to succeed on those claims.

Caremark, Stone, and the Oversight Claim under Delaware Law
The oversight claim has become a preferred tool of plaintiffs’ counsel seeking to hold directors responsible for misfortune that befalls a company. In In re Caremark International Inc. Derivative Litigation, 698 A.2d 959 (Del. Ch. 1996), the seminal decision outlining that claim, the Court of Chancery explained that directors must attempt “in good faith” to ensure that a “corporate information and reporting system” exists to enable the directors to provide adequate oversight of the company’s compliance with applicable laws and regulations. The court added in Caremark that this claim was “possibly the most difficult theory in corporation law upon which a plaintiff might hope to win a judgment.”

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