Delaware Court of Chancery Upholds Another Caremark Claim Against Directors
October 4, 2019

Delaware law usually protects directors in making good faith business decisions.  However, sometimes the failure of directors to oversee a company’s compliance with legal requirements will be so troublesome that this is not the case – providing the basis for a “Caremark claim.”  In a recent decision, the Delaware Court of Chancery re-enforced the message from the Delaware Supreme Court’s decision in Marchand v. Barnhill,[1] in this case for directors of drug development companies, by finding that the plaintiffs adequately pled Caremark breach of fiduciary duty claims for failure of oversight in a regulated industry.  In In re Clovis Oncology Derivative Litigation,[2] the Court of Chancery denied a motion to dismiss, finding that the plaintiffs stated a claim that the directors failed to adequately monitor compliance of the company’s clinical trials of its key drug under development with applicable regulatory protocols and then failed to adequately oversee the company’s disclosures to ensure that they properly reflected the status of the drug’s development.  In so doing, following the lead of the Delaware Supreme Court, the Court emphasized the distinction between a board’s oversight of the company’s management of business risk inherent in its business plan and a board’s oversight of the company’s compliance with regulatory requirements, especially when a key product is involved.[3]

The Court’s findings, based upon the allegations in the complaint, provide a roadmap of how not to run a clinical trial and how not to disclose the results publicly.  According to the complaint, although the company adopted an accepted clinical trial protocol, it failed to follow that protocol by including unconfirmed response rates to the drug in its reported results, which it knew would prevent obtaining FDA approval.  The complaint outlines other problems with the clinical trial, including failure to disclose serious side effects from the drug.  Although the Court found that the board had implemented a reporting or information system, it held that the complaint adequately alleged that the board, with knowledge of the clinical trial protocol and management’s failures to comply with it, did nothing to address this fundamental problem and that this failure of oversight caused the loss when the value of the company plummeted after disclosure of its failed drug trial.

While Caremark oversight duties apply generally, it is now clear that they have particular impact when there are regulatory mandates that require compliance.  These oversight duties have special importance for directors of drug development companies because these companies operate in a highly regulated environment, typically with only a few key products and often with significant risk of failure.

[1] ‎212 A.3d 805 (Del. 2019).‎

[2] Consolidated C.A. No. 2017-0222-JRS (Oct. 1, 2019).

[3] See our prior report here, discussing Rojas v. Ellison, C.A. No. 2018-0755-AGB (July 29, 2019) (citing Marchand v. Barnhill but dismissing a Caremark claim of failing to oversee compliance with a settlement).

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