Delaware Decision Raises Stakes on Duties of Loyalty and Care (July 13, 2019)

Delaware Decision Raises Stakes on Duties of Loyalty and Care (July 13, 2019)

Board Lens

Delaware Decision Raises Stakes on Duties of Loyalty and Care (July 13, 2019)

A ruling by the Delaware Supreme Court in June serves as a reminder that boards are not immune to legal liability. In Marchand v. Barnhill, a shareholder derivative case brought against Blue Bell Creameries USA, its executives, and board, the plaintiffs alleged that the board failed to oversee a key area of risk. Blue Bell in 2015 recalled all of its ice cream products due to a deadly listeria outbreak implicated in the deaths of three consumers, and stopped production, resulting in mass layoffs. To stay afloat, Blue Bell sought additional financing through a stock offering that the plaintiffs claimed negatively affected shareholders. While the Delaware Court of Chancery dismissed the suit, the Delaware Supreme Court overturned that ruling, and held that a shareholder plaintiff made a viable claim under the precedent set by the landmark In re Caremark International Inc. Derivative Litigation.

In the 1996 Caremark decision, the court found that “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.” In Marchand, according to the unanimous decision written by Delaware Supreme Court Justice Leo E. Strine Jr., the court found that while management had reports in its possession that raised major concerns about contamination risks, the plaintiff’s complaint is viable in that that information never reached the board, and the board failed to have an adequate compliance system in place to effectively oversee food safety issues. 

Strine wrote in the court’s opinion that the “complaint alleges that the executives […] breached their duties of care and loyalty by knowingly disregarding contamination risks and failing to oversee the safety of Blue Bell’s food-making operations, and the directors breached their duty of loyalty under Caremark.” The significance of Caremark, Strine reiterated, “is that a corporate board must make a good faith effort to exercise its duty of care. A failure to make that effort constitutes a breach of the duty of loyalty. In short, to satisfy their duty of loyalty, directors must make a good-faith effort to implement an oversight system and then monitor it [at the board level].”

Implications for boards: While directors are mostly shielded from liability for breaches of duty of care, they could be at a heightened risk of liability for breaches of duty of loyalty once the Marchand v. Barnhill decision is rendered under the Chancery court based on the Supreme Court’s decision. Even so, the case implies that directors should take extra care to perform their fiduciary duties with rigor and in good faith. Boards should ensure that they have information, reporting systems, and the proper committees in place to provide strong oversight of key risk and compliance factors specific to their company and industry. 

Key Questions Directors Should Ask:

NACD Resources: NACD’s Resource Centers on Director Liability, Compliance and Ethics Oversight, and Corporate Governance Standards catalog NACD’s latest research, thought leadership, board services, and events specific to these important governance topics. The just-released NACD Washington Review Q2 2019 discusses new and recently introduced legislation and regulation in Washington, including a brief examination of the Marchand v. Barnhill case. "Comply and Control," a package of stories featured in the May/June 2019 issue of NACD Directorship magazine, focuses on litigation, liability, and how to maintain control of your legal destiny as a director.