In re Caremark International Inc. Derivative Litigation
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In re Caremark International Inc. Derivative Litigation, 698 A.2d 959 (Del. Ch. 1996) is a Delaware Court of Chancery decision setting out an expanded discussion of a director's duty of care in the oversight context. The opinion was written by Chancellor Allen.
The case involved director supervision of Caremark International, Inc.. Plaintiffs alleged that inadequate directorial supervision allowed some company employees to engage in unlawful behavior that later became costly to the company.
In language that expanded the traditional view of the directors' duty to exercise oversight, Chancellor Allen wrote:
"A director's obligation includes a duty to attempt in good faith to assure that a corporate information and reporting system, which the board concludes is adequate, exists, and that failure to do so under some circumstances may, in theory at least, render a director liable for losses."
The court went on to define a multi-factor test designed to determine when this duty of care is breached. To show that directors breached their duty of care: (1) The directors knew or should have known that violations of the law were occurring, and (2) The directors took no steps in a good faith effort to prevent or remedy the situation, and (3) Such failure proximately resulted in the losses complained of (could be though of as an affirmative defense under 636 A.2d 956 (Del. Ch. 1994)
Caremark is most widely known and cited for this expanded vision of the duty of oversight.
