Delaware Decision Reminds Directors to Oversee Public Disclosures
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 found that the plaintiffs adequately pled Caremark breach of fiduciary duty claims for failure of oversight of industry-specific regulation as well as of public statements and SEC disclosures.

In In re Clovis Oncology Derivative Litigation,[1] the Court of Chancery denied a motion to dismiss based on plaintiffs’ claim that the directors failed to adequately monitor compliance of the company’s clinical trials of its key drug with applicable regulatory protocols.  The Court also found that plaintiffs adequately pled that the directors failed to oversee the company’s disclosures to ensure that they properly reflected the status of the drug’s development.  In so doing, 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.[2]

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 knew of the clinical trial protocol and management’s failures to comply with it, but did nothing to address this fundamental problem.  The Court also found that the board allowed misleading disclosures of the status of the clinical trial and that the failures of oversight caused the loss when the value of the company plummeted after its failed drug trial was disclosed.

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.

This decision also is a reminder that board members can have responsibility for the accuracy of a company’s public disclosures and should take into account what they know from their other board activities when they review those disclosures.

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

[2] 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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