Marchand v. Barnhill (Del. 2019)

The business judgment rule applies only to actions, not omissions (Aronson v. Lewis, 473 A.2d 805, 813 (Del. 1984)). For omissions, however, the standard of liability itself is deferential to directors.Delaware courts require “bad faith conduct … to establish director oversight liability”—i.e., liability for omissions—and “the fiduciary duty violated by that conduct is the duty of loyalty” (Stone v. Ritter, 911 A.2d 362, 370 (Del. 2006)). Doctrinally then, you might say that the duty of care does not compel any action—inaction violates a duty only if it rises to the level of disloyalty. Specifically, under the so-called Caremark standard,

the necessary conditions predicate for director oversight liability [are]: (a) the directors utterly failed to implement any reporting or information system or controls, or (b) having implemented such a system or controls, consciously failed to monitor or oversee its operations … In either case, … liability requires … that the directors knew that they were not discharging their fiduciary obligations.

— Stone v. Ritter, 911 A.2d 362, 370 (Del. 2006).

As always, the devil is in the details of how the doctrine is applied. For the longest time, Delaware courts had dismissed all Caremark claims. This changed with Marchand v. Barnhill (Del. 2019). Consider the following questions:

1. Facially, what is more deferential to corporate directors: the business judgment rule, or Caremark? Does the outcome in Marchand comport with your answer?
2. Can a Caremark violation be exculpated under DGCL 102(b)(7)?
3. Is it relevant for the outcome or reasoning in Marchand that the corporation harmed third parties (customers) and/or that it may have broken the law (e.g., FDA food safety regulations) as a result of the directors’ alleged lack of oversight?