Caremark (court decision)
| In re Caremark International Inc. Derivative Litigation | |
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| Court | Delaware Court of Chancery |
| Full case name | In re Caremark International Inc. Derivative Litigation |
| Decided | September 25, 1996 |
| Citation(s) | 698 A.2d 959 (Del. Ch. 1996) |
| Court membership | |
| Judge(s) sitting | Chancellor William T. Allen |
| Keywords | |
In re Caremark International Inc. Derivative Litigation, 698 A.2d 959 (Del. Ch. 1996), is a civil action that came before the Delaware Court of Chancery. It is an important case in United States corporate law and discusses a director's duty of care in the oversight context. It raised the question regarding compliance, "what is the board's responsibility with respect to the organization and monitoring of the enterprise to assure that the corporation functions within the law to achieve its purposes?" Chancellor Allen wrote the opinion.
The shareholders of Caremark International, Inc. brought a derivative action, alleging the directors breached their duty of care by failing to put in place adequate internal control systems. This in turn was said to enable the company's employees to commit criminal offences, resulting in substantial fines and civil penalties amounting to over $250 million.
Chancellor Allen noted that most company decisions do not need director supervision. "Legally, the board itself will be required only to authorize the most significant corporate acts or transactions: mergers, changes in capital structure, fundamental changes in business, appointment and compensation of the CEO, etc."
He pointed to Graham v. Allis-Chalmers Mfg. Co., where the company violated antitrust law, without the directors knowing what the employees had done. But the court rejected that the directors ought to have known, because 'absent cause for suspicion there is no duty upon the directors to install and operate a corporate system of espionage to ferret out wrongdoing which they have no reason to suspect exists.' There were no grounds for suspicion here. He said this means that boards do no wrong 'simply for assuming the integrity of employees and the honesty of their dealings.'
But, since Smith v. Van Gorkom, it was clear that 'relevant and timely information is an essential predicate for satisfaction of the board's supervisory and monitoring role under s 141 of the DGCL.' Directors must be 'assuring themselves that information and reporting systems exist in the organization that are reasonably designed to provide 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 both the corporation's compliance with law and its business performance.' The level of detail for any such system is a business judgment matter. But failure to have some reasonable system may 'render a director liable for losses caused by non-compliance with applicable legal standards.'
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