Abstract
Who is accountable for corporate compliance failures? The issue of compliance has emerged as one of the most significant developments in corporate governance over the past decades. However, until recently, corporate law has had surprisingly little to say about the question, leaving the policing of issues such as toxic pollution, product safety, or data privacy to other regulators. This situation has changed dramatically over the past few years. Today, virtually every corporate fiasco is followed by an oversight duty lawsuit against the company’s directors and officers for not doing enough to prevent the debacle. But the rapid resurgence of oversight duties has created a mismatch: the doctrine has become one of the most important in corporate law yet remains one of the least articulated. This Article bridges this mismatch by conceptualizing the doctrine (often dubbed Caremark, after Delaware’s leading precedent). In particular, the Article makes the following four contributions.
First, the Article clarifies what determines a breach of oversight duties. The standard of liability across all types of oversight duty claims is bad faith. Failure-of-oversight claims thus usually boil down to what courts can infer about directors’ mental state from external evidence about directors’ actions and the circumstances in which they took them. The Article identifies the external “markers” that courts use to infer directors’ bad faith: from the centrality of the compliance risk in question, to the relationship between past warnings and current problems, to the clarity of the legal obligations that were violated. Second, the Article articulates the main policy arguments behind each Caremark claim, namely, combatting “willful blindness,” “cosmetic compliance,” corporate recidivism, and managerial short-termism. Third, the Article highlights several ostensibly procedural aspects of oversight duty litigation that have a disproportionate impact on corporate behavior: from privileges to “laches” (when are Caremark claims time-barred?), to how to respond to findings by noncorporate legal forums. In a series of rulings on first impression in 2023, corporate law courts adopted a “liberal” approach across all these issues that boosts the ability to hold individual decision-makers accountable. Finally, the Article evaluates the overall desirability of the resurgence in oversight duty litigation and identifies concrete policy implications, such as how to calculate damages when the company profited from skirting regulations, or what deference to give to the company’s own investigation of failure-of-oversight claims.
