May 27, 2020
Authored by: Jeffrey Russell, Philip Bryans and Brendan Johnson
On April 27, 2020, the Delaware Court of Chancery for the third time in a year denied a motion to dismiss a Caremark claim. The case, Hughes v. Hu, involves a derivative claim against the audit committee and officers of a Delaware corporation, Kandi Technologies Group, Inc., a Nasdaq-traded company based in China that manufactures electric car parts. In denying the motion, Vice Chancellor Laster found that there was a substantial likelihood that the defendants breached their fiduciary duty of loyalty by failing to act in good faith to maintain an adequate board-level oversight.
Two recent Delaware court decisions raised concern that Caremark duties may have expanded: Marchand v. Barnhill (declining to dismiss a Caremark claim against the board of Blue Bell Creamery for failing to make a good-faith effort to implement a system of board-level compliance monitoring and reporting to oversee the food safety of its ice cream production) and In re Clovis Oncology, Inc. Derivative Litigation (where the board “did nothing” when the company released unsubstantiated reports about cancer treatments in clinical trials). However, it appears that the Caremark duties remain unchanged, with Delaware courts underscoring the requirement that directors implement board-level oversight of mission-critical areas in good faith to ensure that the systems are working effectively and heed warnings or “red flags” that are discovered. This view of the line of recent Caremark decisions is further reinforced by Hughes, where serious alleged failures in internal processes regarding related-party transactions resulted in the plaintiff’s claim surviving a motion to dismiss.
The Hughes decision chronicles a long history of problematic internal control and monitoring within