Claims Alleging Breach of Oversight By Directors Clarified

A claim for breach of duty of oversight by directors and officers is known as a “Caremark claim,” after the Delaware Court of Chancery decision in In re Caremark International Inc. Derivative Litigation (1996). The Delaware courts have since recognized two possible paths to impose liability: 1) An “Information Systems Claim”, concerns whether the directors “utterly failed” to implement reporting systems, information systems, or controls to address business and legal risks; 2) A “Red-Flags Claim”, questions whether directors who implemented the necessary systems or controls consciously failed to monitor them. A Vice Chancellor of Delaware’s Court of Chancery addressed recent cases as part of the Court’s decision to dismiss a derivative Red-Flags Claim against the directors of a restaurant chain relating to their alleged failure to address sexual harassment issues and misconduct at the company. He highlighted the points that companies and their risk managers should monitor. In an April article, the Bryan Cave firm provides some key takeaways, among them: “Allow for the board or committee to hear directly from compliance and risk officers, and review systems for reporting of concerns by employees, counterparties or customers; Companies should review their D&O policies to determine whether coverage for officer oversight claims may be available.”