ContractsProf Blog

Editor: Jeremy Telman
Valparaiso University Law School

Tuesday, October 7, 2008

Business Associations Limerick of the Week: Caremark

Chancellor_allenIn In re Caremark International Inc. Derivative Litigation, Chancellor William T. Allen (pictured) set aside the existing Delaware standard governing a Board's duty of oversight, which had been established in the 1963 case, Graham v. Allis Chalmers. In Graham, the Delaware Supreme Court held that directors have no duty to set up a system of corporate self-monitoring absent reason for suspicion that misconduct was occurring within the firm. Chancellor Allen essentially said that things have changed since 1963, and the Graham rule is no longer appropriate.

Instead, the rule is that directors do have a duty to establish and maintain reasonable precautionary measures to prevent corporate misconduct. In this case, Chancellor Allen found that the Board had done so. It is a remarkable opinion in that Chancellor Allen single-handedly remakes Delaware law at the trial court level. The Delaware Supreme Court has subsequently embraced Chancellor Allen's position in Stone v. Ritter, although it ludicrously characterized the duty to monitor as a subsidiary duty of the duty of loyalty rather than applying the duty of care standard as Chancellor Allen did. I mean, come on guys, the case is called Caremark, not Loyaltymark!!

In any case, it is a wonderful tribute to Chancellor Allen that duty of oversight cases are now routinely referred to as Caremark cases.

The case also illustrates the willingness of the Delaware courts to find that shareholder derivative litigation conferred some benefit on the corporation as a whole, justifying an award of lawyers' fees to the plaintiffs' attorneys out of the corporate coffers. The Caremark plaintiffs sought certain prospective measures to prevent a repeat of the sort of misconduct for which Caremark had already paid out $250 million to government agencies and private parties. None of the Caremark directors were implicated in the misconduct, and the Board had already taken almost all of the measures sought by plaintiffs. Chancellor Allen nonetheless approved a settlement granting nearly $1 million in attorneys fees.

In re Caremark International Inc. Derivative Litigation

In Caremark, Chancellor Allen,
Whose mind is as sharp as a talon,
Found the settlement fair,
Though the Board used due care,
And the lawyers got fees by the gallon.

[Jeremy Telman]

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