Saturday, June 1, 2024

I Can't Help It, if You Start Talking About Caremark, it's Like a Honey Pot

Which is why you get an extra blog post this week.

So I’m reading this entire fairness conflicted controller opinion and right there at the end, VC Laster preemptively wanders into a Caremark discussion - and the reason this is important is it hits on some of the issues I’ve blogged about previously with respect to the (over) extension of Caremark.

The case is Firefighters' Pension System v. Foundation Building Materials, and I’ve got threads up at other social media spaces of the horror show of fiduciary breaches (help yourself), but here I’ll talk about the Caremark piece, which is tangential to the actual claims but important for theory. 

The traditional rule is that “Delaware law does not charter law breakers,” articulated in In re Massey Energy Co., 2011 WL 2176479 (Del. Ch. May 31, 2011), and part of a general family of cases that fall under the Caremark rubric that requires Delaware managers to take reasonable steps to ensure legal compliance.

Here’s what VC Laster writes in Foundation Building Materials:

timing principles govern Massey and Caremark claims. Before a plaintiff can invoke those theories, the plaintiff must point to some sufficiently concrete corporate injury. Typically, that will require a prior adjudication that the statute or regulation was violated, the payment of a fine or penalty, or a settlement.

The existence of a predicate injury serves an important policy function by limiting the ability of plaintiffs to use Massey and Caremark claims as vehicles to litigate alleged violations of far-flung statutory and regulatory regimes. Without that type of gating requirement, a stockholder plaintiff could assert that directors had knowingly violated a statutory or regulatory scheme in another state or country, plead facts supporting a statutory violation, and then litigate that claim in the Court of Chancery

In prior blog posts, I’ve expressed concern about how Caremark claims have been used as political weapons to attack corporate conduct even before a prior adjudication of wrongdoing or obvious injury to the corporation.

VC Laster’s new opinion therefore takes some first steps toward cabining that kind of use. 

The problem that remains theoretically, of course, is that to the extent the claim involves intentional lawbreaking, it isn’t intended to protect shareholders at all.  A claim for intentional lawbreaking can proceed even if, ex ante, the corporation calculates - correctly! - that the net present value of the wrongdoing, taking into account the risks involved, financially benefits shareholders.  In that sense, Massey claims are for society, not shareholders; they represent the outer limits of shareholder primacy.

For that reason, one could argue that the requirement of a prior corporate trauma raises questions about “fit.”  If the claim isn't really about shareholders at all, why must there be a corporate trauma first before the claim can be brought? 

The argument would be, I suppose, something like, for the purposes of practicality of enforcement, it's a risk shifting framework.  Directors can take that risk of lawbreaking to benefit shareholders, but they’re the ones who will financially suffer (or their insurance) if the risk doesn’t pan out and ultimately the corporation is injured as a result, because they’ll functionally indemnify the corporation for any damages suffered as a result of the lawbreaking.

The problem is, that kind of calculus fits poorly with Massey-like rhetoric about Delaware not chartering lawbreakers; it ends up right back with a permission structure for lawbreaking.

Ann Lipton | Permalink


One question I have had for a while is whether a shareholder could sue under a Massey/Caremark theory and seek injunctive relief as a way of changing corporate policy. E.g., when Dick's Sporting Goods stopped selling long guns to 18- to 20-year olds, it apparently violated civil rights laws in at least a couple states that prohibit age discrimination in public accommodations. Could a dissident Dick's shareholder have sued in an attempt to force Dick's to change its (unlawful) policy? VC Laster's statements in this case would suggest not.

Posted by: H. Justin Pace | Jun 2, 2024 10:22:39 AM

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