Caremark Compliance for the Next Twenty-Five Years

Abstract

One of the most influential cases in corporate governance is In re Caremark Inc. Derivative Litigation (Caremark). In 1996, Caremark imposed a novel duty on boards of directors to make a good faith attempt to implement and exercise oversight over obligations leading to liability. Breach of this minimal duty has been difficult for plaintiffs to plead and prove, and the caselaw is littered with dismissed Caremark lawsuits. As Caremark’s reign reaches a quarter-century, however, its duties are primed to evolve. Two recent cases, Marchand v. Barnhill and In re Clovis Oncology, Inc. Derivative Litigation, took the rare step of allowing Caremark claims to survive motions to dismiss. These cases signal a new understanding of Caremark obligating boards to not merely attempt oversight, but to proactively ensure that such oversight is effective. This is a subtle but significant change in board duties, and one to which the academic literatures should respond. This manuscript first reviews the Marchand and Clovis cases and argues that these cases hold significance for the future of Caremark claims. Second, this manuscript studies client advisories from law firms and others evaluating the Clovis and Marchand cases, and finds that while these advisories offer useful tactical responses, they lack strategic advice that would benefit boards over the long-term. Filling this gap, this manuscript presents long-term strategic advice for boards in order to not only meet Caremark duties but also thrive as exemplars of good governance and ethical leadership for the next twenty-five years.