fiduciary duty issues in m&a transactions - Jackson Walker LLP

While Caremark recognizes a cause of action for uninformed inaction, the holding is subject tothe following:First, the Court held that “only a sustained or systematic failure of the board to exerciseoversight — such as an utter failure to attempt to assure a reasonable information and reportingsystem exists — will establish the lack of good faith that is a necessary condition to liability.” 72It is thus not at all clear that a plaintiff could recover based on a single example of directorinaction, or even a series of examples relating to a single subject.Second, Caremark noted that “the level of detail that is appropriate for such aninformation system is a question of business judgment,” 73 which indicates that the presence of anexisting information and reporting system will do much to cut off any derivative claim, becausethe adequacy of the system itself will be protected.Third, Caremark considered it obvious that “no rationally designed information system. . . will remove the possibility” that losses could occur. 74 As a result, “[a]ny action seekingrecovery for losses would logically entail a judicial determination of proximate cause.” 75 Thisholding indicates that a loss to the corporation is not itself evidence of an inadequate informationand reporting system. Instead, the court will focus on the adequacy of the system overall andwhether a causal link exists. 76The Caremark issue of a board’s systematic failure to exercise oversight was revisited bythe Seventh Circuit applying Illinois law in In re Abbott Laboratories Derivative ShareholdersLitigation. 77 Abbott involved a shareholders derivative suit against the health care corporation’sdirectors, alleging breach of fiduciary duty and asserting that the directors were liable under statelaw for harms resulting from a consent decree between the corporation and the Food and DrugAdministration (“FDA”). The consent decree had followed a six-year period during which theFDA had given numerous notices to the corporation of violations of FDA manufacturingregulations and imposed a $100 million fine, which resulted in a $168 million charge to earnings.In reversing a district court dismissal of plaintiff’s complaint for failure to adequately plead thatdemand upon the board of directors would be futile, the Seventh Circuit held that the complaintsraised reasonable doubt as to whether the directors’ actions were the product of a valid exerciseof business judgment, thus excusing demand, and were sufficient to overcome the directors’727374757677Id. at 971.Id. at 970.Id.Id. at 970 n.27.See generally Eisenberg, Corporate Governance The Board of Directors and Internal Control, 19 CARDOZO L. REV.237 (1997); Pitt, et al., Talking the Talk and Walking the Walk: Director Duties to Uncover and Respond toManagement Misconduct, 1005 PLI/CORP. 301, 304 (1997); Gruner, Director and Officer Liability for DefectiveCompliance Systems: Caremark and Beyond, 995 PLI/CORP. 57, 64-70 (1997); Funk, Recent Developments inDelaware Corporate Law: In re Caremark International Inc. Derivative Litigation: Director Behavior, ShareholderProtection, and Corporate Legal Compliance, 22 DEL. J. CORP. L. 311 (1997).325 F.3d 795 (7th Cir. 2003). The Abbott court distinguished Caremark on the grounds that in the latter, there was noevidence indicating that the directors “conscientiously permitted a known violation of law by the corporation to occur,”unlike evidence to the contrary in Abbott. Id. at 806 (quoting Caremark, 698 A.2d at 972). However, the Abbott courtnonetheless relied on Caremark language regarding the connection between a board’s systemic failure of oversight anda lack of good faith. Abbott, 325 F.3d at 808-09.5446095v.116