In re Caremark International Inc.

698 A.2d 959 (Del.Ch. 1996)

Facts:

  • 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.

Issue:

  • Whether the settlement agreement was valid.

Holding:

  • 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:
    1. The board had to have failed to provide reasonable oversight in a “sustained and systematic fashion.”
    2. 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.

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