Anticipating the Unanticipated: Director Caremark duties during fast-moving, global events.

• Author: Raymond, Doug
• Position: LEGAL BRIEF

As we have been painfully reminded by recent events, life can come at you fast, and systemic shocks and unanticipated challenges will stress even the best-organized companies. As individuals, families and businesses have struggled to respond to the COVID-19 pandemic, many boards of directors have been working double shifts to keep ahead of the fast-changing situation and oversee the changes in business and operations that are required. While some have argued that this crisis was not foreseeable, in the wake of the Ebola epidemic and the H1N1 (swine flu) virus, most experts were not surprised. And, while at the time of this writing the conclusion of the COVID19 pandemic and its ultimate impact on corporate America are unknown, the obligations of boards in addressing these threats are clear. The board must work to anticipate likely risks and develop appropriate contingency plans to protect the business and its stakeholders against such risks, to the extent possible. Under the line of cases beginning with the Delaware Chancery Court's decision in In re Caremark International Inc. Derivative Litigation, the court set the standard for directors' oversight of the corporation's compliance programs and operations, requiring directors to make a "good faith effort" to implement an oversight system and monitor it.

Two more recent Delaware cases--Marchand v. Barnhill and In re Clovis Oncology, Inc. Derivative Litigation --are instructive in considering how Caremark duties apply to fast-moving, global events such as the COVID-19 pandemic. First, Marchand illustrated that a lack of risk assessment or reporting systems for "mission critical" business matters could constitute a breach of a director's duty of loyalty under Caremark. Second, Clovis clarified that even if reporting systems for "mission critical" business matters exist, failure to properly monitor such systems could result in liability, particularly if directors ignore "red flags."

The COVID-19 pandemic has provided a unique perspective, as it has impacted almost every business, comprehensively demonstrated where companies are most vulnerable, and highlighted differences in how they have responded. Some companies closed their doors almost immediately, moving to fully remote operations. Many others, unable to operate with a remote workforce, remained open, but often with different ways of addressing the concerns of their customers and employees.

These different approaches were often adopted ad...