Summer compliance reading for boards of directors

A recent post by attorneys at the Sullivan & Cromwell law firm on the blog of the Harvard Law School Forum on Corporate Governance and Financial Regulation examined an important decision issued last month by the Delaware Supreme Court which “reversed the dismissal of a stockholder derivative lawsuit against the members of the board of directors and two officers of Blue Bell Creameries USA, Inc., a leading manufacturer of ice cream products. The lawsuit arose out of a serious food contamination incident in 2015 that resulted in widespread product recalls and was linked to three deaths. The Delaware Supreme Court, applying the ‘duty to monitor’ doctrine enunciated in In re Caremark International, Inc. Derivative Litigation, 698 A.2d 959 (Del. Ch. 1996), and noting the very high hurdle to claims under it, nonetheless ruled that the plaintiff had adequately alleged the requisite bad faith by the members of the Blue Bell board. Plaintiff did so by… show[ing] facts supporting their contention that the Company did not have in place ‘a reasonable board-level system of monitoring and reporting’ with respect to food safety, which the Court deemed to be ‘a compliance issue intrinsically critical to the company’s business.’ …[t]he Supreme Court ruled that bad faith was adequately pled by alleging ‘that no board-level system of monitoring or reporting on food safety existed.’ The Court thus declined to dismiss a claim that the directors breached their duty of loyalty, potentially exposing directors to non-exculpated (and potentially not indemnifiable) monetary damages.”

The facts of the Blue Bell case do seem somewhat extreme. Presumably there are not many companies that have zero board oversight for compliance with areas of very high risk. But the case is worth directors’ attention as a reminder that the prospect of personal liability for directors arising from compliance failures is real. Among other things, directors may want to use the occasion of this case being published to review their respective boards’ procedures for monitoring compliance issues.

Also worth reading by directors and others is the Evaluation of Corporate Compliance Programs in Criminal Antitrust Investigations published last week by the US Department of Justice. This document contains an exhaustive list of questions and considerations that the Antitrust Division will use in evaluating compliance programs in investigations, including the following: “Who has overall responsibility for the antitrust compliance program? Is there a chief compliance officer or executive within the company responsible for antitrust compliance? If so, to whom does the individual report, e.g., the Board of Directors, audit committee, or other governing body? How often does the compliance officer or executive meet with the Board, audit committee, or other governing body? How does the company ensure the independence of its compliance personnel?” The Antitrust Division will also ask: “Does [compliance] training include senior management/supervisors and the Board of Directors?”

None of these are trick questions. But some companies would need trick answers if their antitrust compliance program was evaluated by the Justice Department in the context of an investigation. So, this is another reason for a compliance “check up” for prudent boards of directors.