Expanding Compliance Liability for Directors?

A post a few weeks ago discussed the issuance of an important recent judicial decision in Delaware regarding board liability for compliance failures, and specifically the fact that the claim against the directors had survived a motion to dismiss.  Given how few decisions  support claims such as this – what are generally called Caremark cases – it is worth noting that  a second such decision  has been issued only a few weeks later.

As noted in a post this week in the Harvard Law School corporate governance blog by attorneys from the Wachtell Lipton law firm:  Further extending the practical reach of the Caremark doctrine, the Delaware Court of Chancery this week upheld claims against directors of a life sciences firm for failing to ensure accurate reporting of drug trial results. In re Clovis Oncology, Inc. Derivative Litig., C.A. No. 2017-0222-JRS (Del. Ch. Oct. 1, 2019)…. The Clovis directors argued, and the court accepted, that duty-to-monitor claims require a showing of scienter—that is, evidence that the directors knew they were violating their duties. But the court did not require the plaintiff to allege particular facts showing such knowledge. Instead, reasoning that Clovis had a board “comprised of experts” and “operates in a highly regulated industry,” the court concluded that the directors “should have understood” the problem and intervened to fix….Clovis thus highlights the widening risk to boards of directors of fiduciary litigation when bad news can be tied to an alleged compliance failure. …A compliance program is no longer enough. Courts now look for engaged board oversight, and directors should consider implementing procedures to ensure that the board itself monitors “mission critical” corporate risks.

Of course, while such procedures are themselves important, equally key is having a boardroom culture that encourages robust monitoring of compliance risks. For this reason (as well as others) board members should have strong relationships with their respective companies’ chief compliance officers, as CCOs  can – by word and deed – help develop and maintain a culture that is up to this task.

 

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