Just last year, in assessing the extent to which a director has a duty to oversee a corporation’s business affairs, the Business Court noted the “limited guidance” afforded by state statutes and case law. In Lee v. McDowell, 2022 NCBC 28, the Court bridged the gap with its frequent practice of looking “to the well-developed case law of corporate governance in Delaware for guidance.” Id. ¶ 43.
In Lee, the Court assessed breach of fiduciary duty claims against non-employee directors of a foundering startup corporation, including their alleged failure to monitor or check the activities of the company’s key executives. The Court found the closest applicable statutory guidance – N.C. Gen. Stat. § 55-8-30(a) – wanting. That statute requires a director to perform duties “(1) [i]n good faith; (2) [w]ith the care an ordinarily prudent person in a like position would exercise under similar circumstances; and (3) [i]n a manner he [or she] reasonably believes to be in the best interests of the corporation.”
Instead, the Court adopted the rubric of Caremark duties well-established under Delaware law where director oversight liability exists when:
“(a) the directors utterly failed to implement any reporting or information system or controls; or (b) having implemented such a system or controls, consciously failed to monitor or oversee its operations thus disabling themselves from being informed of risks or problems requiring their attention.”
Stone v. Ritter, 911 A.2d 362, 365 (Del. 2006). However, Judge Bledsoe also added that the Caremark standard imposes a “minimal burden” on directors to satisfy their duties to the corporation. Indeed, the Court noted approvingly the proviso of the Delaware court which created the standard that a Caremark claim is “possibly the most difficult theory in corporation law upon which a plaintiff might hope to win a judgment.” Lee, ¶ 47 (quoting City of Birmingham Ret. & Relief Sys. v. Good, 177 A.3d 47, 55 (Del. 2017)).
The tendency of North Carolina courts to “borrow freely” from Delaware decisions on corporate law is likely to get another test given a recent Delaware Court of Chancery decision extending Caremark oversight duties to corporate officers as well as directors. In Re McDonald’s Corporation Stockholder Derivative Litigation, — A.3d —, 2023 WL 387292 (Jan. 26, 2023). As our corporate colleagues Charlie Kogan and Andrew Santana discussed in a recent analysis of the decision, McDonald’s shareholders claimed the company’s former EVP and Chief People Officer, David Fairhurst, breached his fiduciary duties by allowing a corporate culture to develop that condoned sexual harassment.
In extending Caremark duties, the McDonald’s court noted that these oversight obligations are rooted in “the seriousness with which the corporation law views the role of the corporate board.” That gravity, the court reasoned, “extends to the role of officers” who “may have a greater capacity to make oversight and strategic decisions on a day-to-day basis.” Id. *10-11. Moreover, the McDonald’s court observed that because the Delaware Supreme Court already had held that “the fiduciary duties of officers are the same as those of directors,” it was logical that “as to matters within their areas of responsibility, officers owe a duty of oversight.” Id. *13.
Takeaways
- North Carolina’s adoption of Caremark duties for corporate directors likely reflects “a bottom-line requirement that is important: the board must make a good faith effort – i.e., try – to put in place a reasonable board-level system of monitoring and reporting.” Marchand v. Barnhill, 212 A.3d 805, 821 (Del. 2019).
- Corporate officers should not be surprised if the Business Court extends these oversight duties to them when the opportunity next presents itself.
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