Evolution of Director Oversight Duties and Liability Under Caremark: Using Enhanced Information-Acquisition Duties in the Public Interest
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Description
Delaware law imposes four duties on directors to deter misconduct under the Caremark doctrine: (1) the duty not to knowingly commit misconduct or allow it to continue; (2) the duty to establish a system to deter, detect, and inform the board about misconduct; (3) the duty to assert effective oversight over the system; and (4) the duty to exercise effective oversight over detected misconduct. The effectiveness of the first duty, however, depends on whether the other three are effective in inducing the firm to detect and inform directors about detected misconduct, and on whether these duties are imposed to protect society as well as the firm. This chapter shows that Caremark’s traditional formulation is not effective because it gives directors full discretion to adopt systems that do not reliably detect misconduct or ensure they are informed about it. Recently, Delaware has imposed heightened duties on directors to ensure that they are informed about, and respond appropriately to, detected misconduct that is material to the firm or society. This expansion has the potential to enhance social welfare by inducing directors to deter corporate misconduct even when it benefits the firm.
Source Publication
Research Handbook on Corporate Liability
Source Editors/Authors
Martin Petrin, Christian Anton Witting
Publication Date
2023
Recommended Citation
Arlen, Jennifer H., "Evolution of Director Oversight Duties and Liability Under Caremark: Using Enhanced Information-Acquisition Duties in the Public Interest" (2023). Faculty Chapters. 200.
https://gretchen.law.nyu.edu/fac-chapt/200
