698 A.2d 959 (Del.Ch. 1996)
- Caremark’s employees were indicted for violating healthcare fraud statutes, which ultimately resulted in $250M total fines.
- Shareholders of Caremark sued the board of directors derivatively for breach of their fiduciary duty to monitor the ongoings of the corporation.
- Eventually, the Directors and Shareholders came to a settlement agreement, which required approval by the court.
- The court’s review of the settlement forms the basis of this opinion.
- Whether the settlement agreement was valid.
- Yes, the settlement was approved.
- The board of directors can’t assume their corporation is complying with the law.
- The board has an obligation attempt in good faith to invest in or implement a monitoring system that’s sufficient to identify legal breaches by the corporation.
- However, the board’s efforts have a low benchmark:
- The board had to have failed to provide reasonable oversight in a “sustained and systematic fashion.”
- The information reporting system which the board relied on must be deemable as an “utter failure.”
- Note, the system itself can be an utter failure, but the design cannot. The court reviews the design of the system.