“[T]o satisfy their duty of loyalty, directors must make a good faith effort to implement an oversight system and then monitor it.”
Marchand v. Barnhill, 212 A.3d 805 (Del. 2019)
Clovis Oncology’s stock dropped sharply in 2015 when it disclosed poor clinical trial results for Rociletinib a promising experimental drug for the treatment of lung cancer. That meant the FDA was unlikely to approve Rociletinib to enter the market. Shareholder lawsuits ensued. The claim was that board breached its fiduciary duties by disregarding red flags that reports of the drug’s performance in clinical trials were inflated.
Delaware’s Caremark line of cases impose a responsibility on corporate boards to have a compliance program, but with a great deal of discretion to design it for the corporation’s context, industry, and resources. However, that compliance obligation is heightened when the corporation operates in an area of mission-critical regulatory compliance risk.
In the recent decision of In re Clovis Oncology, Inc. Derivative Litigation, the court highlighted the two components required of corporate compliance. First, you have to have an oversight system in place. Second, you have to monitor the oversight system. In area of mission-critical regulatory compliance, board oversight responsibility is heightened.
If you fail to do either, the corporation risks fiduciary litigation when bad news comes out.
Sources:
- In re Clovis Oncology, Inc. Derivative Litig., C.A. No. 2017-0222-JRS (Del. Ch. Oct. 1, 2019)
- Something’s Happening Here: Caremark Bites Another Board
- Delaware Court of Chancery Again Sustains Oversight Claims
- Caremark Duties Include Duty Not Only to Establish Oversight Processes but Also to Monitor Them
- Expanding Compliance Liability for Directors?
- Imposing Caremark Fiduciary Duty on Corporate Officers