Evolution of Director Oversight Duties and Liability under Caremark: Using Enhanced Information-Acquisition Duties in the Public Interest

Evolution of Director Oversight Duties and Liability under Caremark: Using Enhanced Information-Acquisition Duties in the Public Interest

Jennifer Arlen

Series number :

Serial Number: 
680/2023

Date posted :

February 18 2023

Last revised :

February 18 2023
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Keywords

  • Corporate governance • 
  • corporate crime • 
  • Caremark • 
  • director oversight duties • 
  • good faith • 
  • bad faith • 
  • corporate liability • 
  • entity liability • 
  • director fiduciary duties

Corporate law primarily operates to reduce agency costs, but it also has an important role to play in protecting society from social harms resulting from corporate crime. Society needs to leverage corporate law to help deter misconduct because agency problems and under-enforcement undermine the deterrent effects of corporate criminal liability.

Unlike other fiduciary duties, these fiduciary duties should be structured to induce directors to act in society’s interests to deter organizational misconduct, even when shareholders profit from misconduct.

This Chapter examines Delaware’s approach to directors’ fiduciary duties to deter organizational misconduct. Delaware has long held directors liable for knowingly causing misconduct, or allowing it to continue, even to benefit the firm. Delaware also imposed oversight duties on directors through the Caremark doctrine. Yet Caremark as originally formulated is ineffective because it gives directors full discretion over the firm’s compliance function and their oversight of it. Directors thus can avoid liability under Caremark while adopting internal systems and oversight that enhance corporate profits by enabling corporate crime. This Chapter shows that in order to deter misconduct more effectively directors should be subject to more precise duties to obtain information about, and oversee the investigation of, detected violations of laws in which the firm or society has a materially heightened interest in compliance. It then discusses a series of new Caremark cases and shows how they create such duties and appear to imply them to promote social welfare, even when shareholders might profit from crime.

 

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