By Itai Fiegenbaum, St. Thomas University, Benjamin L. Crump College of Law
Can members of an ice cream manufacturer’s board of directors be personally liable for damage attributable to a listeria outbreak at the company’s production facility? What about for failing to ensure corporate compliance with such far-ranging issues as environmental laws, fair election reporting, and the dictates of the Controlled Substances Act? At first glance, the answer appears obvious to well-versed corporate law commentators and practitioners: board oversight liability is analyzed via Delaware’s famous Caremark framework,[1] whose reach transcends jurisdictional boundaries.
Caremark’s prominence stems in part from the doctrine’s position as a battleground for competing policy arguments. That the corporate form creates unavoidable agency costs is an accepted fact. Managerial shirking, or worse, comes readily to mind. Board oversight is theorized to prevent and identify harmful actions taken by corporate underlings before they escalate. Yet directors themselves are equally susceptible to the agency problem. For all the criticism it receives, shareholder litigation remains an important accountability mechanism. But the threat of litigation is only effective up to a point. Unbridled exposure is ultimately detrimental: risk-averse directors may overcorrect, diverting disproportionate time and resources toward monitoring. And the lure of settlement could incentivize a barrage of meritless lawsuits after every corporate failure.
Caremark’s evolution demonstrates the challenge of getting the monitoring incentive structure just right. The decision situated the oversight obligation within the exculpated duty of care—behavior that, by definition, is shielded from liability. That shield undercut the very accountability the monitoring duty was meant to impose. The Delaware Supreme Court acknowledged this tension and recast the oversight obligation as part of the non-exculpable duty of loyalty. [2]
Even so, two features continued to limit the doctrine’s reach. First, liability was confined to failures that allowed illegal activity to occur. If no law was broken, directors could not be held liable. Second, a plaintiff had to establish a high degree of mental culpability to survive a motion to dismiss. These barriers justified Caremark’s reputation as “the most difficult theory in corporation law upon which a plaintiff might hope to win a judgment.”
Until now. In Marchand v. Barnhill, the Delaware Supreme Court introduced a development which fundamentally changes how oversight cases are assessed.[3] Directors are now expected to demonstrate heightened attentiveness in monitoring “mission critical” aspects of the enterprise. Where such areas are ignored, the court may infer a culpable mental state—shifting the burden to the board to prove it acted in good faith. Marchand’s impact was swift. Stringent pleading standards that once shielded directors have softened, and courts have become more willing to draw adverse inferences. In stark contrast to plaintiffs’ success rates in the previous two decades, four oversight claims survived a motion to dismiss in the 18 months after Marchand was handed down.
Caremark’s continued evolution serves as the backdrop for my Article, Director Oversight in Florida: Getting the Balance Right (forthcoming, Florida Law Review Forum), which explores how oversight liability should be assessed under Florida’s corporate law framework.
There are several snags that must be sorted out along the way. First, while Florida courts routinely reference Delaware case law while adjudicating corporate law issues,[4] Caremark and its progeny developed against the background of Delaware’s unique statutory formulation of a director’s exculpation shield. By way of comparison, the Model Business Corporation Act (MBCA) provides for a much broader exculpation shield, effectively immunizing directors from allegations of purely defective oversight. Since the Florida Business Corporation Act (FBCA) generally follows the MBCA, the first order of business is to ascertain whether a Caremark claim is even viable in the Sunshine State.
Second, and after finding that the FBCA permits liability for a mental state that is compatible with negligent monitoring, the Article canvasses the sparse Florida case law that tangentially relates to director oversight. The result of this analysis is disheartening from the viewpoint of doctrinal integrity: the lone Florida case that attempted to apply Caremark did so in a misguided manner, while a more obvious candidate for an oversight analysis was assessed through an incorrect doctrinal lens. Finally, the finding that Florida courts have the ability hold directors liable for negligent oversight does not mean that Florida should blindly follow Marchand’s mission criticality framework. Sure, endorsing Marchand could possibly incentivize more active monitoring, but doing so would come at the expense of compelling countervailing considerations.
The Article is available for download here.
[1] In re Caremark Int’l Inc., Derivative Litigation, 698 A.2d 959 (Del. Ch. 1996) (“Caremark”).
[2] Stone v. Ritter, 911 A.2d 362, 369-70 (Del. 2006) (“It is important, in this context, to clarify a doctrinal issue that is critical to our understanding fiduciary liability under Caremark as we construe that case… The failure to act in good faith may result in liability because the requirement to act in good faith is a subsidiary element i.e., a condition, of the fundamental duty of loyalty. It follows that because a showing of bad faith conduct, in the sense described in Disney and Caremark, is essential to establish director oversight liability, the fiduciary duty violated by that conduct is the duty of loyalty.”) (footnotes and quotations omitted).
[3] Marchand v. Barnhill, 212 A.3d 805 (Del. 2019) (“Marchand”).
[4] See, e.g., Orlinsky v. Patraka, 971 So.2d 796, 802 (2007) (“While there is no Florida case law on point with respect to the issue of a majority shareholder’s alleged breach of fiduciary duty in termination of the employment of a minority shareholder or in paying unequal salaries, we find Dweck v. Nasser, 2005 WL 3272363 (Del. Ch.), cited by Orlinsky in his brief, to be persuasive.”) and Bancor Group, Inc. v. Rodriguez, 2022 WL 2916857 at *7 (S.D. Fla., June 14, 2022) (“Florida courts have turned to Delaware law for guidance in the shareholder derivative suit context, making Delaware case law relevant to the instant case. See First American Bank and Trust v. Frogel, 726 F. Supp. 1292, 1298 (S.D. Fla. 1989).”).